LensCrafters 2007 Annual Report Download - page 133

> 132 | ANNUAL REPORT 2007
Derivative financial instruments. Derivative financial instruments are accounted for in accordance
with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as
amended and interpreted.
SFAS 133 requires that all derivatives, whether or not designed in hedging relationships, be
recorded on the balance sheet at fair value regardless of the purpose or intent for holding them. If
a derivative is designated as a fair-value hedge, changes in the fair value of the derivative and the
related change in the hedge item are recognized in operations. If a derivative is designated as a
cash-flow hedge, changes in the fair value of the derivative are recorded in other comprehensive
income/(loss) (“OCI”) in the Statements of Consolidated Shareholders’ Equity and are recognized
in the consolidated statements of income when the hedged item affects operations. The effect of
these derivatives in the consolidated statements of income depends on the item hedged (for
example, interest rate hedges are recorded in interest expense). For a derivative that does not
qualify as a hedge, changes in fair value are recognized in the consolidated statements of income,
under the caption “Other - net”.
Designated hedging instruments and hedged items qualify for hedge accounting only if there is a
formal documentation of the hedging relationship at the inception of the hedge, hedging
relationship is expected to be highly effective and effectiveness is tested at the inception date and
at least every three months.
Certain transactions and other future events, such as (i) the derivative no longer effectively offsetting
changes to the cash flow of the hedged instrument, (ii) the expiration, termination or sale of the
derivative, or (iii) any other reason of which the Company becomes aware that the derivative no
longer qualifies as a cash flow hedge, would cause the balance remaining in other comprehensive
income to be realized immediately as earnings. Based on current interest rates and market
conditions, the estimated aggregate amount to be recognized as earnings from other
comprehensive income relating to these cash flow hedges in fiscal 2008 is approximately Euro (1.2)
million, net of taxes.
Luxottica Group uses derivative financial instruments, principally interest rate and currency swap
agreements, as part of its risk management policy to reduce its exposure to market risks from
changes in interest and foreign exchange rates. Although it has not done so in the past, the
Company may enter into other derivative financial instruments when it assesses that the risk can be
hedged effectively.
Defined benefit pensions. The funded status of the Company’s defined benefit pension plans is
recognized in the consolidated statement of income. The funded status is measured as the
difference between the fair value of plan assets and the benefit obligation at September 30, the
measurement date. For defined benefit pension plans, the benefit obligation is the projected
benefit obligation (“PBO”), which represents the actuarial present value of benefits expected to be
paid upon retirement based on estimated future compensation levels. The fair value of plan assets
represents the current market value of cumulative company and participant contributions made to
an irrevocable trust fund, held for the sole benefit of participants, which are invested by the trust
fund. Overfunded plans, with the fair value of plan assets exceeding the benefit obligation, are
aggregated and recorded as a prepaid pension asset equal to this excess. Underfunded plans,
with the benefit obligation exceeding the fair value of plan assets, are aggregated and recorded as
a retirement benefit obligation equal to this excess. The current portion of the retirement benefit
obligations represents the actuarial present value of benefits payable in the next 12 months
exceeding the fair value of plan assets, measured on a plan-by-plan basis.