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Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2014
hedges for financial accounting purposes because they protect us against changes in the fair values of certain 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 prepaid expenses and other current assets or other current
liabilities for the 2014 Notes, and other assets or other non-current liabilities for the January 2019 Notes 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 statements of operations with
the corresponding amount included in notes payable, current and other current borrowings for the 2014 Notes, and notes payable and other non-
current borrowings for the January 2019 Notes. The periodic interest settlements for the interest rate swap agreements for the 2014 Notes and
January 2019 Notes are recorded as interest expense.
We do not use any interest rate swap agreements for trading purposes.
Cash Flow Hedges — Cross Currency Swap Agreements
In connection with the issuance of the 2021 Notes, we entered into certain cross-currency swap agreements to manage the related foreign
currency exchange risk by effectively converting the fixed-rate, Euro denominated 2021 Notes, including the annual interest payments and the
payment of principal at maturity, to fixed-rate, U.S. Dollar denominated debt. The economic effect of the swap agreements was to eliminate the
uncertainty of the cash flows in U.S. Dollars associated with the 2021 Notes by fixing the principal amount of the 2021 Notes at $1.6 billion with
a fixed annual interest rate of 3.53%. We have designated these cross-currency swap agreements as qualifying hedging instruments and are
accounting for these as cash flow hedges pursuant to ASC 815. The critical terms of the cross-currency swap agreements correspond to the 2021
Notes, including the annual interest payments being hedged, and the cross
-
currency swap agreements mature at the same time as the 2021 Notes.
We used the hypothetical derivative method to measure the effectiveness of our cross-currency swap agreements. The fair values of these cross-
currency swap agreements are recognized as other assets or other non-current liabilities in our consolidated balance sheets. The effective
portions of the changes in fair values of these cross-currency swap agreements are reported in accumulated other comprehensive loss in our
consolidated balance sheets and an amount is reclassified out of accumulated other comprehensive loss into non-
operating (expense) income, net
in the same period that the carrying value of the Euro denominated 2021 Notes is remeasured and the interest expense is recognized. The
ineffective portion of the unrealized gains and losses on these cross-currency swaps, if any, is recorded immediately to non-operating (expense)
income, net. We evaluate the effectiveness of our cross-currency swap agreements on a quarterly basis. We did not record any ineffectiveness
during fiscal 2014.
We do not use any cross-currency swap agreements for trading purposes.
Net Investment Hedge — Foreign Currency Borrowings
In July 2013, we designated our Euro denominated 2025 Notes as a net investment hedge of our investments in certain of our international
subsidiaries that use the Euro as their functional currency in order to reduce the volatility in stockholders’ equity caused by the changes in
foreign currency exchange rates of the Euro with respect to the U.S. Dollar.
We used the spot method to measure the effectiveness of our net investment hedge. Under this method, for each reporting period, the change in
the carrying value of the Euro denominated 2025 Notes due to remeasurement of the effective portion is reported in accumulated other
comprehensive loss on our consolidated balance sheet and the remaining change in the carrying value of the ineffective portion, if any, is
recognized in non-operating (expense) income, net in our consolidated statements of operations. We evaluate the effectiveness of our net
investment hedge at the beginning of every quarter. We did not record any ineffectiveness during fiscal 2014.
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