Omron 2001 Annual Report Download - page 45

15. Financial
Instruments
and Risk
Management
Financial Instruments
The following table presents the carrying amount and estimated fair value as of March 31, 2001 and 2000, of
the Companies’ financial instruments, both on and off the balance sheet.
Thousands of
Millions of yen U.S. dollars
2001 2000 2001
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
Nonderivatives:
Long-term debt, including
current portion........................................ ¥(58,297) ¥(62,460) ¥(59,230) ¥(68,213) $(470,137) $(503,710)
Derivatives:
Included in Other current assets
(Other current liabilities):
Forward exchange contracts................ (377) (377) 269 269 (3,040) (3,040)
Foreign currency options...................... (334) (334) ——(2,694) (2,694)
Interest rate swaps ............................... — (49) — (45) — (395)
The following methods and assumptions were used to estimate the fair value of each class of financial instru-
ments for which it is practicable to estimate that value:
Nonderivatives
(1) Cash and cash equivalents, notes and accounts receivable, bank loans and notes and accounts payable:
The carrying amounts approximate fair values.
(2) Short-term investments and investment securities (see Note 4):
The fair values are estimated based on quoted market prices or dealer quotes for marketable securities or
similar instruments. Certain equity securities included in investments have no public market value, and it is
not practicable to estimate their fair values.
(3) Long-term debt:
For convertible bonds, the fair values are estimated based on quoted market prices. For other, the fair values
are estimated using the present value of discounted future cash flow analysis, based on the Companies’ cur-
rent incremental issuing rates for similar types of arrangements.
Derivatives
The fair value of derivatives generally reflects the estimated amounts that the Companies would receive or pay
to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses
of open contracts. Dealer quotes are available for most of the Companies’ derivatives; otherwise, pricing or valu-
ation models are applied to current market information to estimate fair value. The Companies do not use deriva-
tives for trading purposes.
(1) Interest rate swap contracts:
The Companies enter into interest rate swap agreements to manage exposure to fluctuations in interest
rates. These agreements involve the exchange of interest obligations on fixed and floating interest rate debt
without exchange of the underlying principal amounts. The agreements generally mature at the time the relat-
ed debt matures. The differential paid or received on interest rate swap agreements is recognized as an
adjustment to interest expense. Notional amounts are used to express the volume of interest rate swap
agreements. The notional amounts do not represent cash flows and are not subject to risk of loss. In the
unlikely event the counterparty fails to meet the terms of an interest rate swap agreement, the Companies’
exposure is limited to the interest rate differential. Management considers the exposure to credit risk to be
minimal since the counterparties are major financial institutions.
At March 31, 2001 and 2000, the notional amounts on which the Companies had interest rate swap agree-
ments outstanding aggregated ¥4,500 million ($36,290 thousand) and ¥4,000 million, respectively. The estimated
fair values of interest rate swap contracts are based on present value of discounted future cash flow analysis.
Omron Corporation 43