National Oilwell Varco 2010 Annual Report Download - page 68

NATIONAL OILWELL VARCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Nature of Business
We design, construct, manufacture and sell comprehensive systems, components, and products used in oil and gas drilling and production,
provide oilfield services and supplies, and distribute products and provide supply chain integration services to the upstream oil and gas industry.
Our revenues and operating results are directly related to the level of worldwide oil and gas drilling and production activities and the profitability
and cash flow of oil and gas companies, drilling contractors and oilfield service companies, which in turn are affected by current and anticipated
prices of oil and gas. Oil and gas prices have been and are likely to continue to be volatile.
Basis of Consolidation
The accompanying Consolidated Financial Statements include the accounts of National Oilwell Varco, Inc. and its majority-owned subsidiaries.
All significant intercompany transactions and balances have been eliminated in consolidation. Investments that are not wholly-owned, but where
we exercise control, are fully consolidated with the equity held by minority owners and their portion of net income (loss) reflected as
noncontrolling interests in the accompanying consolidated financial statements. Investments in unconsolidated affiliates, over which we exercise
significant influence, but not control, are accounted for by the equity method. We reclassified $340 million of deferred tax liabilities from
noncurrent to current on the 2009 balance sheet in order to conform with the 2010 presentation.
2. Summary of Significant Accounting Policies
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash equivalents, receivables, and payables approximated fair value because of
the relatively short maturity of these instruments. Cash equivalents include only those investments having a maturity date of three months or less
at the time of purchase. The carrying values of other financial instruments approximate their respective fair values.
Derivative Financial Instruments
ASC Topic 815, Derivatives and Hedging (ASC Topic 815) requires companies to recognize all of its derivative instruments as either assets
or liabilities in the Consolidated Balance Sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging
relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging
instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments
are foreign currency exchange rate risk and interest rate risk. Forward contracts against various foreign currencies are entered into to manage the
foreign currency exchange rate risk on forecasted revenue and expenses denominated in currencies other than the functional currency of the
operating unit (cash flow hedge).Other forward exchange contracts against various foreign currencies are entered into to manage the foreign
currency exchange rate risk associated with certain firm commitments denominated in currencies other than the functional currency of the
operating unit (fair value hedge).In addition, the Company will enter into non-designated forward contracts against various foreign currencies to
manage the foreign currency exchange rate risk on recognized nonfunctional currency monetary accounts (non-designated hedge).Interest rate
swaps are entered into to manage interest rate risk associated with the Companys fixed and floating-rate borrowings.
The Company records all derivative financial instruments at their fair value in its Consolidated Balance Sheet. Except for certain non-designated
hedges discussed below, all derivative financial instruments that the Company holds are designated as either cash flow or fair value hedges and
are highly effective in offsetting movements in the underlying risks. Such arrangements typically have terms between two and 24 months, but
may have longer terms depending on the underlying cash flows being hedged, typically related to the projects in our backlog. The Company may
also use interest rate contracts to mitigate its exposure to changes in interest rates on anticipated long-term debt issuances.
At December 31, 2010, the Company has determined that its financial assets of $47 million and liabilities of $23 million (primarily currency
related derivatives) are level 2 in the fair value hierarchy. At December 31, 2010, the net fair value of the Companys foreign currency forward
contracts totaled an asset of $24 million. 66