PACCAR 2009 Annual Report Download - page 64

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PACCAR Inc and Subsidiaries
Substantially all of the Company’s interest-rate contracts and some foreign-exchange contracts have been designated
as cash flow hedges. The Company uses regression analysis to assess and measure effectiveness of interest-rate
contracts. For foreign-exchange contracts, the Company performs quarterly assessments to ensure that critical terms
continue to match. Gains or losses on the ineffective portion of cash flow hedges are recognized currently in
earnings and were immaterial for 2009. Hedge accounting is discontinued prospectively when the Company
determines that a derivative financial instrument has ceased to be a highly effective hedge.
Fair Value Hedges: Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings
together with the changes in fair value of the hedged item attributable to the risk being hedged. In 2009, the
Company recognized income of $3.6 on interest rate swaps designated as fair value hedges which was offset by $3.9
of expense on the fixed-rate term notes being hedged. Both the income and expense were recorded in the Financial
Services segment in Interest and other borrowing expenses.
Cash Flow Hedges: Changes in the fair value of derivatives designated as cash flow hedges are recorded in
accumulated other comprehensive income to the extent such hedges are considered effective. Amounts in
accumulated other comprehensive income are reclassified into net income in the same period in which the hedged
transaction affects earnings. Net realized gains and losses from interest-rate contracts are recognized as an
adjustment to interest expense. Net realized gains and losses from foreign-exchange contracts are recognized as an
adjustment to cost of sales or to financial services interest expense, consistent with the hedged transaction.
The following table presents the pre-tax effects of derivative instruments recognized in earnings and Other
Comprehensive Income (OCI):
foreign-
interest-rate exchange
Year Ended December 31, 2009 contracts contracts
(Gain) loss recognized in OCI:
Truck and Other $ (.6)
Financial Services $ 72.0 .2
Total $ 72.0 $ (.4)
(Income) expense reclassified from Accumulated OCI into income:
Truck and Other:
Cost of sales and revenues $ (10.0)
Interest and other expense (income), net (1.7)
Financial Services:
Interest and other borrowing expenses $ 131.4 .2
Total $ 131.4 $ (11.5)
Of the $48.4 accumulated net loss on derivative contracts included in accumulated other comprehensive income as
of December 31, 2009, $39.3, net of taxes, is expected to be reclassified to interest expense or cost of sales in the
following 12 months. The fixed interest earned on finance receivables will offset the amount recognized in interest
expense, resulting in a stable interest margin consistent with the Company’s risk management strategy.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007 (currencies in millions)