Lexmark 2014 Annual Report Download - page 117

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Cash Flow Hedges
Cash flow hedges are hedges of forecasted transactions or of the variability of cash flows to be received or paid related to a recognized
asset or liability. From time to time, Lexmark enters into foreign exchange options generally expiring within twelve months as hedges
of anticipated sales that are denominated in foreign currencies. These contracts are entered into to protect against the risk that the
eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates.
Lexmark entered into a forward starting interest rate swap in December 2012 that was designated as a cash flow hedge. The Company
used this instrument to lock in interest rates for a forecasted issuance of debt. The instrument hedged the risk of changes in cash flows
attributable to changes in the benchmark three-month LIBOR interest rate for the first seven years of interest payments, on the first
$325 million of debt issued in the first quarter of 2013. The instrument was settled at $0.0 million upon the issuance of debt by the
Company in the first quarter of 2013.
Accounting for Derivatives and Hedging Activities
All derivatives are recognized in the Consolidated Statements of Financial Position at their fair value. Fair values for Lexmark’s
derivative financial instruments are based on pricing models or formulas using current market data, or where applicable, quoted
market prices. On the date the derivative contract is entered into, the Company designates the derivative as a fair value hedge or a cash
flow hedge, based upon the nature of the underlying hedged item. Changes in the fair value of a derivative that is highly effective as
— and that is designated and qualifies as — a fair value hedge, along with the loss or gain on the hedged asset or liability are recorded
in current period earnings in Cost of revenue or Other expense (income), net on the Consolidated Statements of Earnings. Changes in
the fair value of a derivative that is highly effective as — and that is designated and qualifies as — a cash flow hedge of a forecasted
sale is recorded in Accumulated other comprehensive loss on the Consolidated Statements of Financial Position, until the underlying
transactions occur, at which time the loss or gain on the derivative is recorded in current period earnings in Revenue on the
Consolidated Statements of Earnings. Derivatives qualifying as hedges are included in the same section of the Consolidated
Statements of Cash Flows as the underlying assets and liabilities being hedged.
Lexmark formally documents all relationships between hedging instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge items. This process includes linking all derivatives that are designated as fair
value and cash flow hedges to specific assets and liabilities on the balance sheet or to forecasted transactions, as appropriate. The
Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge
accounting prospectively, as discussed below.
Lexmark discontinues hedge accounting prospectively when (1) it is determined that a derivative is no longer effective in offsetting
changes in the fair value or cash flows of a hedged item, (2) the derivative expires or is sold, terminated or exercised, or (3) the
derivative is discontinued as a hedge instrument, because it is unlikely that a forecasted transaction will occur. When hedge
accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the
derivative will continue to be carried on the Consolidated Statements of Financial Position at its fair value. When hedge accounting is
discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the
Consolidated Statements of Financial Position at its fair value, and gains and losses that were recorded in Accumulated other
comprehensive loss are recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the
derivative will be carried at its fair value on the Consolidated Statements of Financial Position, with changes in its fair value
recognized in current period earnings.
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