Motorola 2005 Annual Report Download - page 82

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75
sensitivity analysis, the hypothetical change in fair value would be immaterial. The foreign exchange financial
instruments are held for purposes other than trading.
Fair Value Hedges
The Company recorded income of $1.5 million, $0.1 million and $3 million for the years ended December 31,
2005, 2004 and 2003, respectively, representing the ineffective portions of changes in the fair value of fair value
hedge positions. These amounts are included in Other within Other income (expense) in the Company's
consolidated statements of operations. The Company excluded the change in the fair value of derivative contracts
related to the changes in the difference between the spot price and the forward price from the measure of
effectiveness as these amounts are charged to Other within Other income (expense) in the Company's consolidated
statements of operations. Expense (income) related to fair value hedges that were discontinued for the years ended
December 31, 2005, 2004 and 2003 are included in the amounts noted above.
Cash Flow Hedges
The Company recorded expense (income) of $(0.5) million, $11.9 million and $(1.5) million for the years
ended December 31, 2005, 2004 and 2003, respectively, representing the ineffective portions of changes in the fair
value of cash flow hedge positions. These amounts are included in Other within Other income (expense) in the
Company's consolidated statements of operations. The Company excluded the change in the fair value of derivative
contracts related to the changes in the difference between the spot price and the forward price from the measure of
effectiveness as these amounts are charged to Other within Other income (expense) in the Company's consolidated
statement of operations. Expense (income) related to cash flow hedges that were discontinued for the years ended
December 31, 2005, 2004 and 2003 are included in the amounts noted above.
During the years ended December 31, 2005, 2004 and 2003, on a pre-tax basis, expense (income) of
$(21) million, $27 million and $(1) million, respectively, was reclassified from equity to earnings and is included in
Other within Other income (expense) in the Company's consolidated statements of operations. If exchange rates
do not change from year-end, the Company estimates that $2 million of pre-tax net derivative expense included in
Non-owner changes to equity within Stockholders' equity would be reclassified into earnings within the next twelve
months and will be reclassified in the same period that the hedged item affects earnings. The actual amounts that
will be reclassified into earnings over the next twelve months will vary from this amount as a result of changes in
market conditions.
At December 31, 2005, the maximum term of derivative instruments that hedge forecasted transactions was
three years. However, the weighted average duration of the Company's derivative instruments that hedge forecasted
transactions was four months.
Net Investment in Foreign Operations Hedge
At December 31, 2005 and 2004, the Company did not have any hedges of foreign currency exposure of net
investments in foreign operations.
Investments Hedge
In March 2003, the Company entered into agreements with multiple investment banks to hedge up to
25 million of its voting shares of Nextel common stock over periods of three, four and five years, respectively.
Although the precise number of shares of Nextel common stock the Company was required to deliver to satisfy the
contracts was dependent upon the price of Nextel common stock on the various settlement dates, the maximum
aggregate number of shares was 25 million and the minimum number of shares was 18.5 million. Prior to
August 12, 2005, changes in the fair value of these variable share forward purchase agreements (the ""Variable
Forwards'') were recorded in Non-owner changes to equity included in Stockholders' equity. As a result of the
Sprint Nextel Merger, the Company realized the cumulative $418 million loss relating to the Variable Forwards that
had previously been recorded in Stockholders' equity. In addition, the Variable Forwards purchase agreements were
adjusted to reflect the underlying economics of the Sprint Nextel Merger. The Company did not designate the
adjusted Variable Forwards as a hedge of the Sprint Nextel shares received as a result of the merger. Accordingly,
the Company recorded $51 million of gains reflecting the change in value of the Variable Forwards from
August 12, 2005 through the settlement of the Variable Forwards with the counterparties during the fourth quarter
of 2005.