Johnson Controls 2013 Annual Report Download - page 48

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In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for
Impairment.” ASU No. 2011-08 provides companies an option to perform a qualitative assessment to determine whether further
goodwill impairment testing is necessary. If, as a result of the qualitative assessment, it is determined that it is more likely than
not that a reporting unit’s fair value is less than its carrying amount, the two-step quantitative impairment test is required. Otherwise,
no further testing is required. ASU No. 2011-08 is effective for the Company for goodwill impairment tests performed in the current
fiscal year. The adoption of this guidance had no impact on the Company’s consolidated financial condition or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.”
ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of
shareholders’ equity. All non-owner changes in shareholders’ equity instead must be presented either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 was effective for the Company for the
quarter ended December 31, 2012. The adoption of this guidance had no impact on the Company’s consolidated financial condition
or results of operations. Refer to the consolidated statements of comprehensive income (loss) and Note 14, “Equity and
Noncontrolling Interests,” of the notes to consolidated financial statements for disclosures regarding other comprehensive income.
RISK MANAGEMENT
The Company selectively uses derivative instruments to reduce market risk associated with changes in foreign currency,
commodities, interest rates and stock-based compensation. All hedging transactions are authorized and executed pursuant to clearly
defined policies and procedures, which strictly prohibit the use of financial instruments for speculative purposes. At the inception
of the hedge, the Company assesses the effectiveness of the hedge instrument and designates the hedge instrument as either (1) a
hedge of a recognized asset or liability or of a recognized firm commitment (a fair value hedge), (2) a hedge of a forecasted
transaction or of the variability of cash flows to be received or paid related to an unrecognized asset or liability (a cash flow hedge)
or (3) a hedge of a net investment in a non-U.S. operation (a net investment hedge). The Company performs hedge effectiveness
testing on an ongoing basis depending on the type of hedging instrument used. All other derivatives not designated as hedging
instruments under ASC 815, “Derivatives and Hedging,” are revalued in the consolidated statements of income.
For all foreign currency derivative instruments designated as cash flow hedges, retrospective effectiveness is tested on a monthly
basis using a cumulative dollar offset test. The fair value of the hedged exposures and the fair value of the hedge instruments are
revalued, and the ratio of the cumulative sum of the periodic changes in the value of the hedge instruments to the cumulative sum
of the periodic changes in the value of the hedge is calculated. The hedge is deemed as highly effective if the ratio is between 80%
and 125%. For commodity derivative contracts designated as cash flow hedges, effectiveness is tested using a regression calculation.
Ineffectiveness is minimal as the Company aligns most of the critical terms of its derivatives with the supply contracts.
For net investment hedges, the Company assesses its net investment positions in the non-U.S. operations and compares it with the
outstanding net investment hedges on a quarterly basis. The hedge is deemed effective if the aggregate outstanding principal of
the hedge instruments designated as the net investment hedge in a non-U.S. operation does not exceed the Company’s net investment
positions in the respective non-U.S. operation.
The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its fixed-rate
bonds. For the five fixed to floating interest rate swaps totaling $450 million to hedge the coupon of its 1.75% notes maturing
March 2014, the Company elected the short cut method as the criteria to apply the short cut method as defined in ASC 815 was
met and the critical terms for both the hedge and underlying hedged item are identical at inception of the hedge and the presented
reporting periods. In applying the short cut method, the Company is allowed to assume zero ineffectiveness without performing
detailed effectiveness assessments and does not record any ineffectiveness related to the hedge relationship. For remaining interest
rate swaps, the long-haul method is used. The Company therefore assesses retrospective and prospective effectiveness on a quarterly
basis and records any measured ineffectiveness in the consolidated statements of income.
Equity swaps and any other derivative instruments not designated as hedging instruments under ASC 815 require no assessment
of effectiveness on a quarterly basis.
A discussion of the Company’s accounting policies for derivative financial instruments is included in Note 1, “Summary of
Significant Accounting Policies,” of the notes to consolidated financial statements, and further disclosure relating to derivatives
and hedging activities is included in Note 10, “Derivative Instruments and Hedging Activities,” and Note 11, “Fair Value
Measurements,” of the notes to consolidated financial statements.