Pfizer 2005 Annual Report Download - page 54

2005 Financial Report 53
Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
All derivative contracts used to manage interest rate risk are
measured at fair value and reported as assets or liabilities on the
balance sheet. Changes in fair value are reported in earnings or
deferred, depending on the nature and effectiveness of the
offset or hedging relationship, as follows:
•We recognize the earnings impact of interest rate swaps
designated as fair value hedges in Other (income)/deductions—
net upon the recognition of the change in fair value for interest
rate risk related to the hedged items.
•We recognize the earnings impact of interest rate swaps
designated as cash flow hedges in Other (income)/deductions—
net upon the recognition of the interest related to the hedged
items.
Any ineffectiveness in a hedging relationship is recognized
immediately into earnings. There was no significant ineffectiveness
in 2005, 2004 or 2003.
E. Fair Value
The following methods and assumptions were used to estimate
the fair value of derivative and other financial instruments at the
balance sheet date:
•short-term financial instruments (cash equivalents, accounts
receivable and payable, held-to-maturity debt securities and
debt)—we use cost or contract value because of the short
maturity period
•available-for-sale debt securities—we use a valuation model that
uses observable market quotes and credit ratings of the
securities
•available-for-sale equity securities—we use observable market
quotes
•derivative contracts—we use valuation models that use
observable market quotes and our view of the creditworthiness
of the derivative counterparty
•loans—we use cost because of the short interest-reset period
•held-to-maturity long-term investments and long-term debt—
we use valuation models that use observable market quotes
The differences between the estimated fair values and
carrying values of our financial instruments were not significant
at December 31, 2005 and 2004.
F. Credit Risk
On an ongoing basis, we review the creditworthiness of
counterparties to foreign exchange and interest rate agreements
and do not expect to incur a loss from failure of any counterparties
to perform under the agreements.
There are no significant concentrations of credit risk related to our
financial instruments with any individual counterparty. At
December 31, 2005, we had $3.2 billion due from a broad group
of banks around the world.
In general, there is no requirement for collateral from customers.
However, derivative financial instruments are executed under
master netting agreements with financial institutions. These
agreements contain provisions that provide for the ability for
collateral payments, depending on levels of exposure and the
credit rating of the counterparty and us.
10. Inventories
The components of inventories as of December 31 follow:
(MILLIONS OF DOLLARS) 2005 2004
Finished goods $2,303 $2,643
Work-in-process 2,379 2,703
Raw materials and supplies 1,357 1,314
Total inventories $6,039 $6,660
A reclassification was made in 2004 from Finished Goods to Work-
in-process to better reflect the stage of completion.
PRIMARY NOTIONAL AMOUNT
FINANCIAL BALANCE SHEET HEDGE (MILLIONS OF DOLLARS) MATURITY ______________________________
INSTRUMENT CAPTION(a) TYPE(b) HEDGED ITEM 2005 2004 DATE
Swaps ONCL FV U.S. dollar fixed rate debt(c) $5,141 $5,147 2006-
2028
Swaps OCL CF Yen LIBOR interest rate related to forecasted issuances
of short-term debt(d) 1,182 —2006
Swaps ONCL CF Yen LIBOR interest rate related to forecasted issuances
of short-term debt(d) —1,353 2006
(a) The primary balance sheet caption indicates the financial statement classification of the fair value amount associated with the financial
instrument used to hedge interest rate risk. The abbreviations used are defined as follows: OCL = Other current liabilities and ONCL = Other
noncurrent liabilities.
(b) CF = Cash flow hedge; FV = Fair value hedge.
(c) Serve to reduce exposure to long-term U.S. dollar interest rates by effectively converting fixed rates associated with long-term debt obligations
to floating rates (see Note 9C, Financial Instruments: Long-Term Debt for details of maturity dates).
(d) Serve to reduce variability by effectively fixing the maximum rates on short-term debt at 0.8%.
We entered into derivative financial instruments to hedge the
fixed or variable interest rates on the hedged item, matching the
amount and timing of the hedged item. At December 31, 2005 and
2004, the more significant derivative financial instruments
employed to manage interest rate risk follow: