North Face 2002 Annual Report Download - page 64

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82
effects of exchange rate fluctuations on specific foreign currency transactions or anticipated cash flows occurring
within 12 months. Use of hedging contracts allows the Company to reduce its overall exposure to exchange rate
movements since gains and losses on these contracts will offset losses and gains on the transactions being
hedged. The Company formally documents all hedged transactions and hedging instruments, and assesses, both
at the inception of the contract and on an ongoing basis, whether the hedging instruments are effective in offset-
ting changes in cash flows of the hedged transactions. The Company does not use derivative financial instruments
for trading or speculative purposes.
All contracts are reported at fair value, with changes in fair value reported in earnings or deferred in Other
Comprehensive Income, depending on the nature and effectiveness of the hedged item or the underlying risk.
Any ineffectiveness in a hedging relationship is recognized immediately in earnings. The Company recognizes the
earnings impact of foreign currency forward exchange contracts designated as cash flow hedges as an offset of
the earnings impact of the hedged transaction at the time in which the hedged transaction affects operating
earnings. These foreign currency cash flow hedges relate to a portion of the Company’s significant foreign curren-
cy cash flows for inventory purchases and production costs, product sales and intercompany royalty payments
anticipated for the following 12 months. The earnings impact of foreign currency forward exchange contracts
designated as fair value hedges is recognized in Miscellaneous Income during the terms of the contracts, which
offsets the earnings impact of the underlying hedged item. Foreign currency fair value hedges relate to intercom-
pany financing arrangements.
The following summarizes, by major currency, the net United States dollar equivalent amount of the Company’s
foreign currency forward exchange contracts:
2002 2001
Notional Value– Fair Value– Notional Value– Fair Value–
In thousands Bought (Sold) Asset (Liability) Bought (Sold) Asset (Liability)
Mexican peso $64,202 $(2,534) $71,298 $3,068
European euro (60,028) (3,323) (53,982) 1,052
Canadian dollar (11,014) (17) (28,938) 681
Other (16,878) 8 (19,274) (66)
$(5,866) $4,735
The Company recognized net pretax losses of $.3 million during 2002 and net pretax gains of $7.2 million during
2001, primarily in Cost of Products Sold, for hedging contracts that had matured. As of January 4, 2003, net pre-
tax losses of $8.5 million were deferred in Accumulated Other Comprehensive Income; these net deferred losses
are expected to be reclassified into earnings during 2003 at the time the underlying hedged transactions are real-
ized. Foreign exchange contracts outstanding at the end of 2000, and related gains and losses during 2000, were
not significant.