Kraft 2009 Annual Report Download - page 200

deferred portion as a component of cost of sales when the related inventory is sold. Ineffectiveness is
directly recorded as a component of cost of sales. For the derivative instruments that we consider
economic hedges but do not designate for hedge accounting treatment, we recognize gains and losses
directly as a component of cost of sales.
Foreign currency cash flow hedges - We use various financial instruments to mitigate our exposure to
changes in exchange rates from third-party and intercompany actual and forecasted transactions.
These instruments include forward foreign exchange contracts, foreign currency swaps and foreign
currency options. Based on the size and location of our businesses, we use these instruments to
hedge our exposure to certain currencies, including the euro, Swiss franc, British pound and Canadian
dollar.
For those derivative instruments that are highly effective and qualify for hedge accounting treatment,
we defer the effective portion of unrealized gains and losses associated with forward, swap and option
contracts as a component of accumulated other comprehensive earnings / (losses) until the underlying
hedged transactions are reported in earnings. We recognize the deferred portion as a component of
cost of sales when the related inventory is sold or as interest and other expense, net for our hedges of
intercompany loans, when the payments are made. For those derivative instruments that we consider
economic hedges but do not designate for hedge accounting treatment, we recognize gains and losses
directly as a component of cost of sales or interest and other expense, net, depending on the nature of
the underlying transaction.
Interest rate cash flow and fair value hedges - We manage interest rate volatility by modifying the
repricing or maturity characteristics of certain liabilities so that the net interest margin is not, on a
material basis, adversely affected by movements in interest rates. As a result of interest rate
fluctuations, hedged fixed-rate liabilities appreciate or depreciate in market value. The effect of this
unrealized appreciation or depreciation is expected to be substantially offset by our gains or losses on
the derivative instruments that are linked to these hedged liabilities.
We use derivative instruments, including interest rate swaps that have indices related to the pricing of
specific liabilities as part of our interest rate risk management strategy. As a matter of policy, we do not
use highly leveraged derivative instruments for interest rate risk management. We use interest rate
swaps to economically convert a portion of our nonprepayable fixed-rate debt into variable-rate debt.
Under the interest rate swap contracts, we agree with other parties to exchange, at specified intervals,
the difference between fixed-rate and floating-rate interest amounts, which is calculated based on an
agreed-upon notional amount. We also use interest rate swaps to hedge the variability of interest
payment cash flows on a portion of our future debt obligations. Substantially all of these derivative
instruments are highly effective and qualify for hedge accounting treatment.
For those derivative instruments that are highly effective and qualify for hedge accounting treatment,
we either record the impacts in current period earnings or defer the effective portion of unrealized
gains and losses as a component of accumulated other comprehensive earnings / (losses), depending
on whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge. For fair
value hedges, we record both (i) the gains or losses on interest rate swaps and (ii) the corresponding
changes in fair value of the hedged long-term debt directly as a component of interest and other
expense, net. For cash flow hedges, we recognize the deferred portion as a component of interest and
other expense, net when we incur the interest expense. The ineffective portion is directly recorded as a
component of interest and other expense, net. For the derivative instruments that we consider
economic hedges but do not designate for hedge accounting treatment, we recognize gains and losses
directly as a component of interest and other expense, net.
Hedges of net investments in foreign operations - We have numerous investments in foreign
subsidiaries. The net assets of these subsidiaries are exposed to volatility in foreign currency
exchange rates. We use foreign-currency-denominated debt to hedge our net investment in foreign
operations against adverse movements in exchange rates. We designated our euro denominated
borrowings as a net investment hedge of a portion of our overall European operations. The gains and
losses on our net investment in these designated European operations are economically offset by
losses and gains on our euro denominated borrowings. The change in the debt’s fair value is recorded
in the currency translation adjustment component of accumulated other comprehensive earnings /
(losses).
Guarantees:
Authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees
requires us to disclose certain guarantees and to recognize a liability for the fair value of the obligation
of qualifying guarantee activities. See Note 13, Commitments and Contingencies for a further
discussion of guarantees.
Income Taxes:
Prior to our spin-off from Altria, we were included in Altria’s consolidated federal income tax return. We
generally computed income taxes on a separate company basis; however, some of our foreign tax
credits, capital losses and other credits could not be used on a separate company basis. To the extent
that Altria used our foreign tax credits and other tax benefits in its consolidated federal income tax
return, we recognized the benefit in the calculation of our provision for income taxes. This benefit was
approximately $270 million in 2007. We made payments to, or were reimbursed by, Altria for the tax
effects resulting from being included in Altria’s tax return. As of March 31, 2007, we were no longer a
member of the Altria consolidated tax return group. We file our own federal consolidated income tax
returns. As a result of the spin-off, Altria transferred our federal tax contingencies to our balance sheet
and related interest income of $77 million in 2007. Additionally, during 2007, Altria paid us $305 million
for the federal tax contingencies held by them, less the impact of federal reserves reversed due to the
adoption of new guidance, discussed below, which addressed accounting for the uncertainty in income
Source: KRAFT FOODS INC, 10-K, February 25, 2010 Powered by Morningstar® Document Research℠