Omron 2002 Annual Report Download - page 45

15. Financial
Instruments
and Risk
Management
Financial Instruments
The following table presents the carrying amounts and estimated fair values as of March 31, 2002 and 2001, of
the Companies’ financial instruments.
Thousands of
Millions of yen U.S. dollars
2002 2001 2002
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
Nonderivatives:
Long-term debt, including current portion .... ¥(43,988) ¥(46,307) ¥(58,297) ¥(62,460) $(330,736) $(348,173)
Derivatives:
Included in Other current liabilities:
Forward exchange contracts ............. (540) (540) (377) (377) (4,060) (4,060)
Foreign currency options ................... (65) (65) (334) (334) (489) (489)
Interest rate swaps............................. (15) (15) — (49) (113) (113)
The following methods and assumptions were used to estimate the fair values 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 simi-
lar instruments. Certain equity securities included in investments have no public market value, and it is not prac-
ticable 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 present value of discounted future cash flow analysis, based on the Companies’ current
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 valuation
models are applied to current market information to estimate fair value. The Companies do not use derivatives for
trading purposes.
Changes in the fair value of foreign exchange forward contracts and foreign currency options designated and
qualifying as cash flow hedges are reported in accumulated other comprehensive income (loss). These amounts are
subsequently reclassified into earnings through Foreign exchange loss, net in the same period as the hedged items
affect earnings. Substantially all of the accumulated other comprehensive income (loss) in relation to foreign
exchange forward contracts and foreign currency options at March 31, 2002 is expected to be reclassified into
earnings within twelve months.
The effective portions of changes in the fair value of foreign exchange forward contracts and foreign currency
options designated as cash flow hedges and reported in accumulated other comprehensive income (loss), net of
the related tax effect, are losses of ¥1,673 million ($12,579 thousand) for the year ended March 31, 2002. The
amounts, which were reclassified out of accumulated other comprehensive income (loss) into Foreign exchange
loss, net or Interest expense, net, depending on their nature, net of the related tax effect, are net losses of ¥1,605
million ($12,068 thousand) for the year ended March 31, 2002. The amount of the hedging ineffectiveness is not
material for the year ended March 31, 2002.
The Companies enter into interest rate swap agreements, which do not meet the hedging criteria of SFAS
No. 133. These interest rate swap agreements are recorded at fair value in the consolidated balance sheets. The
changes in fair values are recorded in current period earnings.
(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 related 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 coun-
terparty fails to meet the terms of an interest rate swap agreement, the Companies’ exposure is limited to the
Omron Corporation 43