National Oilwell Varco 2015 Annual Report Download - page 84

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Table of Contents
debt liability, consistent with debt discounts, as opposed to current presentation of an asset on the balance sheet. ASU No. 2015-03 is effective for fiscal years
beginning after December 15, 2015, with early adoption permitted. The Company does not expect the adoption of ASU No. 2015-03 will have a material
effect on its consolidated financial position and results of operations.
In May 2014, the FASB issued Accounting Standard Update No. 2014-09 “Revenue from Contracts with Customers” (ASU No. 2014-09), which supersedes
the revenue recognition requirements in Accounting Standard Codification Topic No. 605 “Revenue Recognition” and most industry-specific guidance. This
update requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which a company expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for fiscal years beginning after
December 15, 2017, and for interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of ASU No. 2014-09 on
its consolidated financial position and results of operations.

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is foreign
currency exchange rate risk. Forward contracts against various foreign currencies are entered into to manage the foreign currency exchange rate risk on
forecasted revenues 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).
At December 31, 2015, the Company has determined that the fair value of its derivative financial instruments representing assets of $26 million and
liabilities of $286 million (primarily currency related derivatives) are determined using level 2 inputs (inputs other than quoted prices in active markets for
identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy
as the fair value is based on publicly available foreign exchange and interest rates at each financial reporting date. At December 31, 2015, the net fair value of
the Company’s foreign currency forward contracts totaled a net liability of $260 million.
At December 31, 2015, the Company’s financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated
payments when the Company’s financial instruments are in net liability positions. We do not use derivative financial instruments for trading or speculative
purposes.
Cash Flow Hedging Strategy
To protect against the volatility of forecasted foreign currency cash flows resulting from forecasted revenues and expenses, the Company has instituted a cash
flow hedging program. The Company hedges portions of its forecasted revenues and expenses denominated in nonfunctional currencies with forward
contracts. When the U.S. dollar strengthens against the foreign currencies, the decrease in present value of future foreign currency revenues and expenses is
offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the U.S. dollar weakens, the increase in the present value of
future foreign currency cash flows is offset by losses in the fair value of the forward contracts.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is
subject to a particular currency risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Other Comprehensive
Income (Loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period
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