Intel 2005 Annual Report Download - page 60

Table of Contents
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest Rate Risk.
The company’s primary objective for holding investments in debt securities is to preserve principal while maximizing yields
without significantly increasing risk. To achieve this objective, the returns on the company’s investments in fixed-rate debt securities are generally
based on three-month LIBOR or, if longer term, are generally swapped to U.S. dollar LIBOR-based returns, using interest rate swaps and currency
interest rate swaps in transactions that are not designated as hedges for accounting purposes. The floating interest rates on the swaps are reset on a
monthly, quarterly or semiannual basis. Changes in fair value of the debt securities classified as trading assets are generally offset by changes in fair
value of the related derivatives, resulting in negligible net impact recorded in interest and other, net.
The company may also enter into interest rate swap agreements to modify the interest characteristics of a portion of its outstanding long-term debt.
These transactions would likely be designated as fair value hedges. The gains or losses from the changes in fair value of the interest rate swaps, as well
as the offsetting change in the hedged fair value of the long-term debt, would be recognized in interest expense.
Equity Market Risk.
The company may enter into transactions designated as fair value hedges using equity options, swaps or forward contracts to
hedge the equity market risk of marketable securities in its portfolio of strategic equity investments once the securities are no longer considered to have
strategic value. The gain or loss from the change in fair value of these equity derivatives, as well as the offsetting change in hedged fair value of the
underlying equity securities, would be recognized currently in gains (losses) on equity securities, net. The company may use equity derivatives in
transactions not designated as hedges to offset the change in fair value of certain equity securities classified as trading assets. The company may or
may not enter into transactions to reduce or eliminate the market risks of its investments in strategic equity derivatives, including warrants.
Measurement of Effectiveness of Hedge Relationships.
For most currency forward contracts, effectiveness is measured by comparing the cumulative
change in the hedge contract with the cumulative change in the hedged item. For currency forward contracts used in cash flow hedging strategies
related to long-term capital purchases, forward points are excluded and effectiveness is measured using spot rates to value both the hedge contract and
the hedged item. For currency options and equity options accounted for as cash flow hedges, effectiveness is measured by comparing the cumulative
change in the hedge contract with the cumulative change in the hedged item. For currency options and equity options accounted for as fair value
hedges, time value is excluded and effectiveness is measured based on spot rates to value both the hedge contract and the hedged item. For interest rate
swaps, effectiveness is measured by comparing the change in fair value of the hedged item with the change in fair value of the interest rate swap.
Any ineffective portion of the hedges, as well as amounts excluded from the assessment of effectiveness, are recognized currently in earnings within
the same income statement line item as the underlying hedged transaction. If a cash flow hedge were to be discontinued because it is not probable that
the original hedged transaction will occur as anticipated, the unrealized gain or loss on the related derivative would be reclassified into earnings.
Subsequent gains or losses on the related derivative instrument would be recognized in income in each period until the instrument matures, is
terminated, is re-designated as a qualified hedge or is sold.
For all periods presented, the portion of hedging instruments’ gains or losses excluded from the assessment of effectiveness and the ineffective
portions of hedges had an insignificant impact on earnings for both cash flow and fair value hedges. For all periods presented, there was no significant
impact on results of operations from discontinued cash flow hedges as a result of forecasted transactions that did not occur. For 2005, $38 million of
net deferred gains were reclassified from accumulated other comprehensive income to cost of sales or operating expense related to the company’s
non-U.S. currency capital purchase hedging program and operating cost hedging program ($8 million in 2004 and $1 million in 2003). The company
estimates that less than $10 million of net derivative losses included in other comprehensive income will be reclassified into earnings within the next
12 months.
Inventories
Inventory cost is computed on a currently adjusted standard basis (which approximates actual cost on an average or first-in, first-out basis). Inventory
is determined to be saleable based on a demand forecast within a specific time horizon, generally six months or less. Inventory in excess of saleable
amounts is not valued and the remaining inventory is valued at the lower of cost or market. Inventories at fiscal year-ends were as follows:
56
(In Millions)
2005
2004
Raw materials
$
409
$
388
Work in process
1,662
1,418
Finished goods
1,055
815
Total inventories
$
3,126
$
2,621