Oracle 2009 Annual Report Download - page 207

DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
(USD $)
12 Months Ended
05/31/2010
DERIVATIVE FINANCIAL INSTRUMENTS 11. DERIVATIVE FINANCIAL INSTRUMENTS
We adopted the disclosure requirements of ASC 815 during fiscal 2009 and have provided these disclosures
prospectively from the year of adoption.
Interest Rate Swap Agreements
Fair Value Hedges
In September 2009, we entered into interest rate swap agreements that have the economic effect of modifying
the fixed interest obligations associated with the 2014 Notes (as defined in Note 8) so that the interest payable
on these notes effectively became variable based on LIBOR. The critical terms of the interest rate swap
agreements and the 2014 Notes match, including the notional amounts and maturity dates. Accordingly, we
have designated these swap agreements as qualifying hedging instruments and are accounting for them as fair
value hedges pursuant to ASC 815. These transactions are characterized as fair value hedges for financial
accounting purposes because they protect us against changes in the fair value of our fixed rate borrowings due
to benchmark interest rate movements. The changes in fair values of these interest rate swap agreements are
recognized as interest expense in our consolidated statements of operations with the corresponding amounts
included in other assets or other non-current liabilities in our consolidated balance sheets. The amount of net
gain (loss) attributable to the risk being hedged is recognized as interest expense in our consolidated statement
of operations with the corresponding amount included in notes payable and other non-current borrowings. The
periodic interest settlements, which occur at the same interval as the 2014 Notes, are recorded as interest
expense.
We do not use any interest rate swap agreements for trading purposes.
Cash Flow Hedges
In relation to the variable interest obligations associated with our senior notes that were due and paid in May
2010 and May 2009 (Floating Rate Notes), we entered into certain variable to fixed interest rate swap
agreements to manage the economic effects of the variable interest obligations and designated these agreements
as qualifying cash flow hedges. Upon payment of the Floating Rate Notes in May 2010 and May 2009, we also
settled the interest rate swap agreements associated with these notes and no arrangements were outstanding as of
May 31, 2010. The unrealized losses on these interest rate swap agreements were included in accumulated other
comprehensive income and the corresponding fair value payables were included in other current liabilities in
our consolidated balance sheet. The periodic interest settlements, which occurred at the same interval as the
Floating Rate Notes were recorded as interest expense.
Net Investment Hedges
Periodically, we hedge net assets of certain of our international subsidiaries using foreign currency forward
contracts to offset the translation and economic exposures related to our foreign currency-based investments in
these subsidiaries. These contracts have been designated as net investment hedges pursuant to ASC 815. We
entered into these net investment hedges for all of fiscal 2009 and the majority of fiscal 2010. We suspended
this program during our fourth quarter of fiscal 2010 and, as of May 31, 2010, we have no contracts outstanding
(one contract was outstanding as of May 31, 2009 in Japanese Yen with a nominal fair value and notional
amount of $694 million).
We used the spot method to measure the effectiveness of our net investment hedges. Under this method for each
reporting period, the change in fair value of the forward contracts attributable to the changes in spot exchange
rates (the effective portion) was reported in accumulated other comprehensive income on our consolidated
balance sheet and the remaining change in fair value of the forward contract (the ineffective portion, if any) was
recognized in non-operating income (expense), net, in our consolidated statement of operations. We recorded
settlements under these forward contracts in a similar manner. The fair values of both the effective and
ineffective portions were recorded to our consolidated balance sheet as prepaid expenses and other current
assets for amounts receivable from the counterparties or other current liabilities for amounts payable to the
counterparties.
Foreign Currency Forward Contracts Not Designated as Hedges
We transact business in various foreign currencies and are subject to risks associated with the effects of certain
foreign currency exposures. We have a program that primarily utilizes foreign currency forward contracts to
offset these risks associated with foreign currency exposures. Our program may be suspended from time to time.
This program was active for the majority of fiscal 2010 and was suspended during our fourth quarter of fiscal
2010. When this program is active, we enter into foreign currency forward contracts so that increases or
decreases in our foreign currency exposures are offset by gains or losses on the foreign currency forward
contracts in order to mitigate the risks and volatility associated with our foreign currency transactions. Our
foreign currency exposures typically arise from intercompany sublicense fees and other intercompany
transactions that are expected to be cash settled in the near term. Although we have suspended our historical
foreign currency forward contract program as of May 31, 2010, our subsidiaries continue to enter into
cross-currency transactions and create cross-currency exposures via intercompany arrangements and we expect
that these transactions and exposures will continue. Our ultimate realized gain or loss with respect to currency
fluctuations will generally depend on the size and type of cross-currency transactions that we enter into, the
currency exchange rates associated with these exposures and changes in those rates, whether we have entered
into foreign currency forward contracts to offset these exposures and other factors.
Historically, we have neither used these foreign currency forward contracts for trading purposes nor have
designated these forward contracts as hedging instruments pursuant to ASC 815. Accordingly, we recorded the
fair value of these contracts as of the end of our reporting period to our consolidated balance sheet with changes
in fair value recorded in our consolidated statement of operations. The balance sheet classification for the fair
values of these forward contracts was prepaid expenses and other current assets for unrealized gains and other
current liabilities for unrealized losses. The statement of operations classification for the fair values of these
forward contracts was non-operating income (expense), net, for both realized and unrealized gains and losses.
As of May 31, 2010, we had a nominal amount of foreign currency forward contracts outstanding. As of May
31, 2009, the notional amounts of the forward contracts we held to purchase and sell U.S. Dollars in exchange
for other major international currencies were $860 million and $1.1 billion, respectively, and the notional
Source: ORACLE CORP, 10-K, July 01, 2010 Powered by Morningstar® Document Research℠