Oracle 2015 Annual Report Download - page 118

Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2016
11. DERIVATIVE FINANCIAL INSTRUMENTS
Fair Value Hedges—Interest Rate Swap Agreements
In July 2014, we entered into certain interest rate swap agreements that have the economic effect of modifying the fixed-interest obligations associated with our
October 2019 Notes and July 2021 Notes so that the interest payable on these senior notes effectively became variable based on LIBOR. In July 2013, we entered
into certain interest rate swap agreements that have the economic effect of modifying the fixed-interest obligations associated with our January 2019 Notes so that
the interest payable on these senior notes effectively became variable based on LIBOR. The critical terms of the interest rate swap agreements match the critical
terms of the October 2019 Notes, July 2021 Notes and the January 2019 Notes that the interest rate swap agreements pertain to, including the notional amounts and
maturity dates.
We have designated the aforementioned interest rate 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 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 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 statements of
operations with the corresponding amount included in notes payable, non-current. The periodic interest settlements for the interest rate swap agreements for the
October 2019 Notes, July 2021 Notes and the January 2019 Notes are recorded as interest expense and are included as a part of cash flows from operating
activities.
In July 2014, we settled the fixed to variable interest rate swap agreements associated with the July 2014 Notes. 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 our January 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 January 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 January 2021 Notes by fixing the principal amount of the January 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 January 2021 Notes, including the annual interest payments being hedged, and the
cross-currency swap agreements mature at the same time as the January 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 income (expense), net in the same period that the carrying value of the Euro-denominated January
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 income (expense), net. We evaluate the effectiveness of our cross-currency swap agreements on a quarterly basis. We did
not record any ineffectiveness for fiscal 2016, 2015 or 2014. The cash flows related to the cross-currency swap agreements that
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