Kraft 2009 Annual Report Download - page 199

non-U.S. pension plans (other than certain Canadian and French pension plans) at September 30 of
each year. On December 31, 2008, we recorded an after-tax decrease of $8 million to retained
earnings using the 15-month approach to proportionally allocate the transition adjustment required
upon adoption of the measurement provision of the new guidance. The plan assets and benefit
obligations of our pension plans and the benefit obligations of our postretirement plans are now all
measured at year-end.
We provide a range of benefits to our employees and retired employees. These include pension
benefits, postretirement health care benefits and postemployment benefits, consisting primarily of
severance. We provide pension coverage for certain employees of our non-U.S. subsidiaries through
separate plans. Local statutory requirements govern many of these plans. For salaried and non-union
hourly employees hired in the U.S. after January 1, 2009, we discontinued benefits under our U.S.
pension plans, and we replaced them with an enhanced company contribution to our employee
savings plan. Additionally, we will be freezing the U.S. pension plans for current salaried and
non-union hourly employees effective December 31, 2019. Pension accruals for all salaried and
non-union employees who are currently earning pension benefits will end on December 31, 2019, and
continuing pay and service will be used to calculate the pension benefits through December 31, 2019.
Our projected benefit obligation decreased $168 million in 2009, and we incurred a $5 million
curtailment charge in 2009 related to the freeze. Our U.S. and Canadian subsidiaries provide health
care and other benefits to most retired employees. Local government plans generally cover health care
benefits for retirees outside the U.S. and Canada. Our postemployment benefit plans cover most
salaried and certain hourly employees. The cost of these plans is charged to expense over the working
life of the covered employees.
Financial Instruments:
As we operate globally, we use certain financial instruments to manage our foreign currency exchange
rate, commodity price and interest rate risks. We monitor and manage these exposures as part of our
overall risk management program. Our risk management program focuses on the unpredictability of
financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets
may have on our operating results. We maintain foreign currency, commodity price and interest rate
risk management strategies that seek to reduce significant, unanticipated earnings fluctuations that
may arise from volatility in foreign currency exchange rates, commodity prices and interest rates,
principally through the use of derivative instruments.
Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness
between the hedging instrument and the item being hedged, both at inception and throughout the
hedged period. We formally document the nature of and relationships between the hedging
instruments and hedged items, as well as our risk management objectives, strategies for undertaking
the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges
of forecasted transactions, the significant characteristics and expected terms of the forecasted
transaction must be specifically identified, and it must be probable that each forecasted transaction will
occur. If we deem it probable that the forecasted transaction will not occur, we recognize the gain or
loss in earnings currently.
By using derivatives to hedge exposures to changes in exchange rates, commodity prices and interest
rates, we have exposure on these derivatives to credit and market risk. We are exposed to credit risk
that the counterparty might fail to fulfill its performance obligations under the terms of the derivative
contract. We minimize our credit risk by entering into transactions with high quality counterparties with
investment grade credit ratings, limiting the amount of exposure we have with each counterparty and
monitoring the financial condition of our counterparties. In October 2008, one of our counterparties,
Lehman Brothers Commercial Corporation, filed for bankruptcy. Consequently, we wrote off an
insignificant asset related to derivatives held with them. This did not have a significant impact on our
foreign currency risk management program. We also maintain a policy of requiring that all significant,
non-exchange traded derivative contracts with a duration greater than one year be governed by an
International Swaps and Derivatives Association master agreement. Market risk is the risk that the
value of the financial instrument might be adversely affected by a change in foreign currency exchange
rates, commodity prices or interest rates. We manage market risk by incorporating monitoring
parameters within our risk management strategy that limit the types of derivative instruments and
derivative strategies we use, and the degree of market risk that may be undertaken by the use of
derivative instruments.
We record derivative financial instruments at fair value in our consolidated balance sheets as either
current assets or current liabilities. Cash flows from hedging instruments are classified in the same
manner as the affected hedged item in the consolidated statements of cash flows.
Commodity cash flow hedges - We are exposed to price risk related to forecasted purchases of certain
commodities that we primarily use as raw materials. Accordingly, we use commodity forward contracts
as cash flow hedges, primarily for meat, coffee, dairy, sugar, cocoa and wheat. Commodity forward
contracts generally qualify for the normal purchase exception under guidance for derivative
instruments and hedging activities, and therefore are not subject to its provisions. We use commodity
futures and options to hedge the price of certain input costs, including dairy, coffee, cocoa, wheat, corn
products, soybean oils, meat products, sugar, natural gas and heating oil. Some of these derivative
instruments are highly effective and qualify for hedge accounting treatment. We also sell commodity
futures to unprice future purchase commitments, and we occasionally use related futures to
cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not
use financial instruments for speculative purposes.
For those derivative instruments that are highly effective and qualify for hedge accounting treatment,
we defer the effective portion of unrealized gains and losses on commodity futures and option
contracts as a component of accumulated other comprehensive earnings / (losses). We recognize the
Source: KRAFT FOODS INC, 10-K, February 25, 2010 Powered by Morningstar® Document Research℠