Nike 2012 Annual Report Download - page 60

PART II
NOTE 16 — Risk Management and Derivatives
The Company is exposed to global market risks, including the effect of
changes in foreign currency exchange rates and interest rates, and uses
derivatives to manage financial exposures that occur in the normal course of
business. The Company does not hold or issue derivatives for trading
purposes.
The Company may elect to designate certain derivatives as hedging
instruments under the accounting standards for derivatives and hedging. The
Company formally documents all relationships between designated hedging
instruments and hedged items as well as its risk management objective and
strategy for undertaking hedge transactions. This process includes linking all
derivatives designated as hedges to either recognized assets or liabilities or
forecasted transactions.
The majority of derivatives outstanding as of May 31, 2012 are designated as
cash flow or fair value hedges. All derivatives are recognized on the balance
sheet at fair value and classified based on the instrument’s maturity date. The
total notional amount of outstanding derivatives as of May 31, 2012 was
approximately $7 billion, which is primarily comprised of cash flow hedges for
Euro/U.S. Dollar, British Pound/Euro, and Japanese Yen/U.S. Dollar currency
pairs.
The following table presents the fair values of derivative instruments included within the consolidated balance sheets as of May 31, 2012 and 2011:
Asset Derivatives Liability Derivatives
(In millions)
Balance Sheet
Location May 31, 2012 May 31, 2011 Balance Sheet Location May 31, 2012 May 31, 2011
Derivatives formally designated as
hedging instruments:
Foreign exchange forwards and
options
Prepaid expenses
and other
current assets $ 203 $ 22 Accrued liabilities $ 35 $ 170
Interest rate swap contracts
Prepaid expenses
and other
current assets — — Accrued liabilities — —
Foreign exchange forwards and
options
Deferred income
taxes and other
long-term assets 7 7
Deferred income
taxes and other
long-term liabilities — 10
Interest rate swap contracts
Deferred income
taxes and other
long-term assets 15 15
Deferred income
taxes and other
long-term liabilities — —
Total derivatives formally
designated as hedging instruments 225 44 35 180
Derivatives not designated as
hedging instruments:
Foreign exchange forwards and
options
Prepaid expenses
and other current
assets $ 55 $ 9 Accrued liabilities $ 20 $ 16
Embedded derivatives
Prepaid expenses
and other current
assets 1 — Accrued liabilities — —
Foreign exchange forwards and
options
Deferred income
taxes and other
long-term assets — —
Deferred income
taxes and other
long-term liabilities — 1
Total derivatives not designated
as hedging instruments 56 9 20 17
TOTAL DERIVATIVES $ 281 $ 53 $ 55 $ 197
The following tables present the amounts affecting the consolidated statements of income for years ended May 31, 2012, 2011 and 2010:
Derivatives formally designated
(In millions)
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
on Derivatives(1)
Amount of Gain (Loss)
Reclassified From Accumulated
Other Comprehensive Income into Income(1)
Year Ended May 31, Location of Gain (Loss)
Reclassified From Accumulated
Other Comprehensive Income
Into Income(1)
Year Ended May 31,
2012 2011 2010 2012 2011 2010
Derivatives designated as cash flow hedges:
Foreign exchange forwards and options $ (29) $ (87) $ (30) Revenue $ 5 $ (30) $ 51
Foreign exchange forwards and options 253 (152) 89 Cost of sales (57) 103 60
Foreign exchange forwards and options 3 (4) 5 Selling and administrative expense (2) 1 1
Foreign exchange forwards and options 36 (65) 51 Other expense (income), net (9) 34 56
Total designated cash flow hedges $ 263 $ (308) $ 115 $ (63) $ 108 $ 168
Derivatives designated as net investment hedges:
Foreign exchange forwards and options $ 45 $ (85) $ 66 Other expense (income), net $ — $ — $ —
(1) For the years ended May 31, 2012, 2011, and 2010, the amounts recorded in other expense (income), net as a result of hedge ineffectiveness and the discontinuance of cash flow hedges
because the forecasted transactions were no longer probable of occurring were immaterial.
60