Memorex 2010 Annual Report Download - page 79

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strategies. The fair value of our derivative instruments is determined based on inputs that are observable in the public
market, but are other than publicly quoted prices (Level 2).
We are exposed to the risk of nonperformance by our counter-parties in foreign currency forward and option
contracts, but we do not anticipate nonperformance by any of these counter-parties. We actively monitor our exposure to
credit risk through the use of credit approvals and credit limits and by using major international banks and financial
institutions as counter-parties.
Cash Flow Hedges
We attempt to substantially mitigate the risk that forecasted cash flows denominated in foreign currencies may be
adversely affected by changes in currency exchange rates through the use of option, forward and combination option
contracts. The degree of our hedging can fluctuate based on management judgment and forecasted projections. We
formally document all relationships between hedging instruments and hedged items, as well as our risk management
objective and strategy for undertaking the hedge items. This process includes linking all derivatives to forecasted
transactions.
We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in
hedging transactions are highly effective in offsetting changes in the cash flows of hedged items. Gains and losses related
to cash flow hedges are deferred in accumulated other comprehensive income (loss) with a corresponding asset or liability.
When the hedged transaction occurs, the gains and losses in accumulated other comprehensive income (loss) are
reclassified into the Consolidated Statements of Operations in the same line as the item being hedged. If at any time it is
determined that a derivative is not highly effective as a hedge, we discontinue hedge accounting prospectively, with
deferred gains and losses being recognized in current period operations.
Other Hedges
We enter into foreign currency forward contracts, generally with durations of one to three months, to manage the
foreign currency exposure related to our monetary assets and liabilities denominated in foreign currencies. We record the
estimated fair value of these forwards within other current assets or other current liabilities in the Consolidated Balance
Sheets and all changes in their fair value are immediately recognized in the Consolidated Statements of Operations.
As of December 31, 2010 and 2009, cash flow hedges ranged in duration from one to 15 months and had a total
notional amount of $246.0 million and $48.0 million, respectively. Hedge losses, of $0.1 million, $3.8 million, and $0.4 million
were reclassified into the Consolidated Statements of Operations in 2010, 2009 and 2008, respectively. The amount of net
deferred gains on foreign currency cash flow hedges included in accumulated other comprehensive income (loss) in
shareholders’ equity as of December 31, 2010 was $0.5 million, pre-tax, which depending on market factors is expected to
reverse in the Consolidated Balance Sheets or be reclassified into operations in 2011.
As of December 31, 2010 and 2009, we had a notional amount of forward contracts of $47.1 million and $88.8 million,
respectively, to hedge our recorded balance sheet exposures.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)