Pfizer 2008 Annual Report Download - page 68

Notes to Consolidated Financial Statements
Pfizer Inc and Subsidiary Companies
In March 2007, we filed a securities registration statement with the Securities and Exchange Commission. The registration
statement was filed under the automatic shelf registration process available to “well-known seasoned issuers” and is effective for
three years. We can issue securities of various types under that registration statement at any time, subject to approval by our Board
of Directors in certain circumstances.
D. Derivative Financial Instruments and Hedging Activities
Foreign Exchange Risk—A significant portion of revenues, earnings and net investments in foreign affiliates is exposed to changes
in foreign exchange rates. We seek to manage our foreign exchange risk in part through operational means, including managing
expected same currency revenues in relation to same currency costs and same currency assets in relation to same currency
liabilities. Depending on market conditions, foreign exchange risk is also managed through the use of derivative financial
instruments and foreign currency debt. These financial instruments serve to protect net income and net investments against the
impact of the translation into U.S. dollars of certain foreign exchange denominated transactions.
We entered into financial instruments to hedge, or offset by the same currency, an appropriate portion of the currency risk and the
timing of the hedged or offset item. As of December 31, 2008 and 2007, the more significant financial instruments employed to
manage foreign exchange risk follow:
INSTRUMENT(a)
PRIMARY
BALANCE
SHEET
CAPTION(b)
HEDGE
TYPE(c) HEDGED OR OFFSET ITEM
NOTIONAL AMOUNT
(MILLIONS OF DOLLARS) MATURITY
DATE
08/072008 2007
Forwards OCL — Short-term foreign currency assets and liabilities(d) $13,381 $10,672 2009/2008
Forwards OCL CF Yen available-for-sale investments 4,224 2,666 2009/2008
Forwards OCA CF Euro available-for-sale investments 2,558 — 2009
Forwards OCL CF Swedish krona intercompany borrowing 2,153 — 2009
ST yen borrowings STB NI Yen net investments 1,574 1,679 2009/2008
LT yen debt LTD NI Yen net investments 1,325 530 2011
Swap ONCL — Euro fixed rate debt 1,247 — 2014
Swap OA — Euro fixed rate debt 1,247 1,321 2017
LT yen debt LTD NI Yen net investments 718 574 After 2013
Swaps OCL NI Swedish krona net investments(e) —8,288 2008
Forwards OCL CF Euro available-for-sale investments —5,297 2008
Swaps OCA CF Swedish krona intercompany loan —5,156 2008
Forwards OCL CF U.K. pound available-for-sale investments —1,419 2008
Swap OA — Euro fixed rate debt —1,321 2014
Swaps OCA NI Euro net investments —916 2008
Swaps OCL NI Yen net investments —686 2008
ST yen debt STB NI Yen net investments —530 2008
(a) Forwards = Forward-exchange contracts; ST yen borrowings = Short-term yen borrowings; ST yen debt = Short-term yen debt; LT yen debt = Long-
term yen debt.
(b) The primary consolidated balance sheet caption indicates the financial statement classification of the amount associated with the financial
instrument used to hedge or offset foreign exchange risk. The abbreviations used are defined as follows: OCA = Taxes and other current assets;
OA = Other assets, deferred taxes and deferred charges; STB = Short-term borrowings, including current portion of long-term debt; OCL = Other
current liabilities; LTD = Long-term debt; and ONCL = Other noncurrent liabilities.
(c) CF = Cash flow hedge; NI = Net investment hedge.
(d) Forward-exchange contracts used to offset short-term foreign currency assets and liabilities were primarily for intercompany transactions in euros,
Japanese yen, Swedish krona and U.K. pounds for both years ended December 31, 2008 and 2007.
(e) In 2007, reflects an increase in Swedish krona net investments due to the receipt of proceeds related to the sale of our Consumer Healthcare
business in Sweden in late 2006.
All derivative contracts used to manage foreign currency risk are measured at fair value and reported as assets or liabilities on the
consolidated balance sheet. Changes in fair value are reported in earnings or deferred, depending on the nature and purpose of the
financial instrument (offset or hedge relationship) and the effectiveness of the hedge relationships, as follows:
•We recognize the earnings impact of foreign currency swaps and foreign currency forward-exchange contracts designated as cash flow
hedges in Other (income)/deductions—net upon the recognition of the foreign exchange gain or loss on the translation to U.S. dollars of
the hedged items.
•We recognize the earnings impact of foreign currency swaps and forward-exchange contracts that are used to offset foreign currency
assets or liabilities in Other (income)/deductions—net during the terms of the contracts, along with the earnings impact of the items they
generally offset.
•We recognize the earnings impact of foreign currency swaps designated as a hedge of our net investments in Other (income)/
deductions—net in three ways: over time-for the periodic net swap payments; immediately-to the extent of any change in the difference
between the foreign exchange spot rate and forward rate; and upon sale or substantial liquidation of our net investments-to the extent
of change in the foreign exchange spot rates.
66 2008 Financial Report