PACCAR 2009 Annual Report Download - page 63

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P. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used to hedge exposures to fluctuations in interest rates and foreign currency
exchange rates. Certain derivative instruments designated as either cash flow hedges or fair value hedges are subject
to hedge accounting. Derivative instruments that are not subject to hedge accounting are held as economic hedges.
The Company’s policies prohibit the use of derivatives for speculation or trading. At inception of each hedge
relationship, the Company documents its risk management objectives, procedures and accounting treatment.
Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company
had no material exposures to default at December 31, 2009.
Interest-Rate Contracts: The Company enters into various interest-rate contracts, including interest-rate swaps and
cross currency interest-rate swaps. Interest-rate swaps involve the exchange of fixed for floating rate or floating for
fixed rate interest payments based on the contractual notional amounts in a single currency. Cross currency
interest-rate swaps involve the exchange of notional amounts and interest payments in different currencies. These
contracts are used to manage exposures to fluctuations in interest rates and foreign currency exchange rates. Net
amounts paid or received are reflected as adjustments to interest expense.
At December 31, 2009, the notional amount of the Company’s interest-rate contracts was $3,541.2. Notional
maturities for all interest-rate contracts are $1,396.0 for 2010, $1,148.9 for 2011, $826.5 for 2012, $29.3 for 2013
and $140.5 for 2014. The majority of these contracts are floating to fixed swaps that effectively convert an
equivalent amount of commercial paper and other variable rate debt to fixed rates.
Foreign-Exchange Contracts: The Company enters into foreign-exchange contracts to hedge certain anticipated
transactions and assets and liabilities denominated in foreign currencies, particularly the Canadian dollar, the euro,
the British pound, the Australian dollar and the Mexican peso. At December 31, 2009, the notional amount of the
outstanding foreign-exchange contracts was $155.1. Foreign-exchange contracts mature within one year.
The following table presents the balance sheet locations and fair value of derivative financial instruments:
At December 31, 2009 assets liabilities
Derivatives designated under hedge accounting:
Interest-rate contracts:
Financial Services:
Other assets $ 10.8
Deferred taxes and other liabilities $ 107.1
Foreign-exchange contracts:
Truck and Other:
Deferred taxes and other current assets .1
Accounts payable and accrued expenses .2
Total $ 10.9 $ 107.3
Economic hedges:
Interest-rate contracts:
Financial Services:
Other assets $ .4
Deferred taxes and other liabilities $ 9.0
Foreign-exchange contracts:
Truck and Other:
Accounts payable, accrued expenses and other .2
Financial Services:
Other assets .3
Deferred taxes and other liabilities .1
Total $ .7 $ 9.3
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007 (currencies in millions)