Oracle 2010 Annual Report Download - page 119

Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2011
11. DERIVATIVE FINANCIAL INSTRUMENTS
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 our
3.75% senior notes due July 2014 (2014 Notes) 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, Derivatives and Hedging. 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. As of May 31, 2011 and 2010, the fair values of these interest rate swap agreements recorded as other assets in our
consolidated balance sheets were $69 million and $33 million, respectively.
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 floating rate senior notes that were due and repaid in May 2010 (Floating Rate Notes), we had
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 repayment of the Floating Rate Notes in May 2010, we settled the interest rate swap agreements associated
with the Floating Rate Notes and no other arrangements were outstanding as of May 31, 2011.
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 the majority of fiscal 2010. We suspended this program during our fourth quarter of fiscal 2010 and,
as of May 31, 2011, we have no contracts of this nature outstanding. For fiscal 2010 and 2009, (losses) gains related to these contracts were recognized to
accumulated other comprehensive income (effective portion) for $(37) million and $(63) million, respectively and to non-operating income (expense), net
(ineffective portion and amount excluded from effectiveness testing) for $1 million and $10 million, respectively.
Foreign Currency Forward Contracts Not Designated as Hedges
We transact business in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to offset the risks
associated with the effects of certain foreign currency exposures. Under this program, our strategy is to 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
115
Source: ORACLE CORP, 10-K, June 28, 2011 Powered by Morningstar® Document Research℠