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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
103
Forecasted Debt Issuance
The company is exposed to interest rate volatility on future
debt issuances. To manage this risk, the company may use for-
ward-starting interest rate swaps to lock in the rate on the interest
payments related to the forecasted debt issuance. These swaps
are accounted for as cash flow hedges. The company did not have
any derivative instruments relating to this program outstanding at
December31, 2015 and 2014.
At December31, 2015 and 2014, net gains of less than $1million
(before taxes), respectively, were recorded in accumulated other
comprehensive income/(loss) in connection with cash flow hedges
of the company’s borrowings. Within these amounts, less than
$1million of gains, respectively, are expected to be reclassified
to net income within the next 12 months, providing an offsetting
economic impact against the underlying transactions.
Foreign Exchange Risk
Long-Term Investments in Foreign Subsidiaries
(Net Investment)
A large portion of the company’s foreign currency denominated
debt portfolio is designated as a hedge of net investment in for-
eign subsidiaries to reduce the volatility in stockholders’ equity
caused by changes in foreign currency exchange rates in the
functional currency of major foreign subsidiaries with respect to
the U.S. dollar. The company also uses cross-currency swaps and
foreign exchange forward contracts for this risk management pur-
pose. At December31, 2015 and 2014, the total notional amount of
derivative instruments designated as net investment hedges was
$5.5billion and $2.2billion, respectively. The weighted-average
remaining maturity of these instruments at December31, 2015 and
2014 was approximately 0.2years for both periods.
Anticipated Royalties and Cost Transactions
The company’s operations generate significant nonfunctional cur-
rency, third-party vendor payments and intercompany payments for
royalties and goods and services among the company’s non-U.S.
subsidiaries and with the parent company. In anticipation of these
foreign currency cash flows and in view of the volatility of the cur-
rency markets, the company selectively employs foreign exchange
forward contracts to manage its currency risk. These forward con-
tracts are accounted for as cash flow hedges. The maximum length
of time over which the company is hedging its exposure to the vari-
ability in future cash flows is four years. At December31, 2015 and
2014, the total notional amount of forward contracts designated as
cash flow hedges of forecasted royalty and cost transactions was
$8.2billion and $9.3billion, respectively, with a weighted-average
remaining maturity of 0.7years for both periods.
At December31, 2015 and 2014, in connection with cash flow
hedges of anticipated royalties and cost transactions, the company
recorded net gains of $147million and net gains of $602million
(before taxes), respectively, in accumulated other comprehensive
income/(loss). Within these amounts $121million of gains and
$572million of gains, respectively, are expected to be reclassified
to net income within the next 12 months, providing an offsetting
economic impact against the underlying anticipated transactions.
Foreign Currency Denominated Borrowings
The company is exposed to exchange rate volatility on foreign
currency denominated debt. To manage this risk, the company
employs cross-currency swaps to convert fixed-rate foreign cur-
rency denominated debt to fixed-rate debt denominated in the
functional currency of the borrowing entity. These swaps are
accounted for as cash flow hedges. The maximum length of time
over which the company hedges its exposure to the variability in
future cash flows is approximately seven years. At December31,
2015 and December31, 2014, no amounts were outstanding under
this program.
At December31, 2015 and 2014, in connection with cash flow
hedges of foreign currency denominated borrowings, the company
recorded net losses of $2million (before taxes), respectively, in
accumulated other comprehensive income/(loss). Within these
amounts, less than $1million of losses, respectively, are expected
to be reclassified to net income within the next 12 months, provid-
ing an offsetting economic impact against the underlying exposure.
Subsidiary Cash and Foreign Currency
Asset/Liability Management
The company uses its Global Treasury Centers to manage the
cash of its subsidiaries. These centers principally use currency
swaps to convert cash flows in a cost-effective manner. In addi-
tion, the company uses foreign exchange forward contracts to
economically hedge, on a net basis, the foreign currency exposure
of a portion of the company’s nonfunctional currency assets and
liabilities. The terms of these forward and swap contracts are gen-
erally less than one year. The changes in the fair values of these
contracts and of the underlying hedged exposures are generally
offsetting and are recorded in other (income) and expense in the
Consolidated Statement of Earnings. At December31, 2015 and
2014, the total notional amount of derivative instruments in eco-
nomic hedges of foreign currency exposure was $11.7billion and
$13.1billion, respectively.
Equity Risk Management
The company is exposed to market price changes in certain broad
market indices and in the company’s own stock primarily related to
certain obligations to employees. Changes in the overall value of
these employee compensation obligations are recorded in SG&A
expense in the Consolidated Statement of Earnings. Although not
designated as accounting hedges, the company utilizes deriva-
tives, including equity swaps and futures, to economically hedge
the exposures related to its employee compensation obligations.
The derivatives are linked to the total return on certain broad
market indices or the total return on the company’s common stock.
They are recorded at fair value with gains or losses also reported
in SG&A expense in the Consolidated Statement of Earnings. At
December31, 2015 and 2014, the total notional amount of deriv-
ative instruments in economic hedges of these compensation
obligations was $1.2billion and $1.3billion, respectively.