Nike 2003 Annual Report Download - page 58

NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Results of hedges of selling and administrative expense are recorded together with those costs when the related
expense is recorded. Results of hedges of anticipated intercompany transactions are recorded in other income/
expense when the transaction occurs. Hedges of recorded balance sheet positions are recorded in other income/
expense currently together with the transaction gain or loss from the hedged balance sheet position. Net foreign
currency transaction gains and losses, which includes hedge results captured in revenues, cost of sales, selling
and administrative expense and other income/expense, were a $180.9 million loss, a $42.7 million gain, and a
$129.6 million gain for the years ended May 31, 2003, 2002, and 2001, respectively.
Premiums paid on options are initially recorded as deferred charges. The Company assesses effectiveness on
options based on the total cash flows method and records total changes in the options’ fair value to other
comprehensive income to the degree they are effective.
As of May 31, 2003, $171.9 million of deferred net losses (net of tax) on both outstanding and matured
derivatives accumulated in other comprehensive income are expected to be reclassified to net income during the
next twelve months as a result of underlying hedged transactions also being recorded in net income. Actual
amounts ultimately reclassified to net income are dependent on the exchange rates in effect when derivative
contracts that are currently outstanding mature. As of May 31, 2003, the maximum term over which the
Company is hedging exposures to the variability of cash flows for all forecasted and recorded transactions is
18 months.
The Company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash
flows of hedged items and whether those derivatives may be expected to remain highly effective in future
periods. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, the
Company discontinues hedge accounting prospectively.
The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no
longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items such as
firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it
is no longer probable that the forecasted transaction will occur; or (4) management determines that designating
the derivative as a hedging instrument is no longer appropriate.
When the Company discontinues hedge accounting because it is no longer probable that the forecasted
transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated
other comprehensive income and is reclassified to net income when the forecasted transaction affects net income.
However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time
period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in
other comprehensive loss will be recognized immediately in net income. In all situations in which hedge
accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its
fair value on the balance sheet, recognizing future changes in the fair value in current-period net income. Any
hedge ineffectiveness is recorded in current-period net income. Effectiveness for cash flow hedges is assessed
based on forward rates.
For the year ended May 31, 2003 the Company recorded in other income/expense an insignificant loss
representing the total ineffectiveness of all derivatives. An insignificant gain was recorded in other income/
expense for the year ended May 31, 2002. Net income for each of the years ended May 31, 2003 and 2002 was
not materially affected due to discontinued hedge accounting.
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