Pfizer 2011 Annual Report Download - page 82

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
consolidated balance sheet. Changes in fair value are reported in earnings, as follows:
•We recognize the gains and losses on interest rate swaps that are designated as fair value hedges in earnings upon the recognition of
the change in fair value of the hedged risk. We recognize the offsetting earnings impact of fixed-rate debt attributable to the hedged risk
also in earnings.
Any ineffectiveness is recognized immediately into earnings. There was no significant ineffectiveness for any period presented.
Information about the gains/(losses) incurred to hedge or offset operational foreign exchange or interest rate risk follows:
AMOUNT OF
GAINS/(LOSSES)
RECOGNIZED IN OID(a), (b), (c)
AMOUNT OF
GAINS/(LOSSES)
RECOGNIZED IN OCI
(EFFECTIVE PORTION)(a), (d)
AMOUNT OF
GAINS/(LOSSES)
RECLASSIFIED FROM
OCI INTO OID
(EFFECTIVE PORTION)(a), (d)
(MILLIONS OF DOLLARS)
Dec. 31,
2011
Dec. 31,
2010
Dec. 31,
2011
Dec. 31,
2010
Dec. 31,
2011
Dec. 31,
2010
Derivative Financial Instruments in Cash
Flow Hedge Relationships
Foreign currency swaps $–– $–– $ (496) $(1,054) $(243) $(704)
Derivative Financial Instruments in Net
Investment Hedge Relationships
Foreign currency swaps 7(1) (1,059) (97) –– ––
Derivative Financial Instruments Not
Designated as Hedges
Foreign currency forward-exchange
contracts (260) (454) –– —–– ––
Foreign currency swaps 106 20 –– –– –– ––
Non-Derivative Financial Instruments in
Net Investment Hedge Relationships
Foreign currency short-term
borrowings –– –– 940 (241) –– ––
Foreign currency long-term debt –– –– (41) (91) –– ––
All other, net 15 1(4) (6) 42
Total $(132) $(434) $ (660) $(1,489) $(239) $(702)
(a) OID = Other (income)/deductions––net, included in the income statement account, Other deductions—net. OCI = Other comprehensive income/
(loss), included in the balance sheet account Accumulated other comprehensive loss.
(b) Also includes gains and losses attributable to the hedged risk in fair value hedged relationships.
(c) There was no significant ineffectiveness for any of the periods presented.
(d) Amounts presented represent the effective portion of the gain or loss. For derivative financial instruments in cash flow hedge relationships, the
effective portion is included in Other comprehensive income/(loss)–derivative financial instruments. For derivative financial instruments in net
investment hedge relationships and for foreign currency debt designated as hedging instruments, the effective portion is included in Other
comprehensive income/(loss)––currency translation adjustment and other.
For information about the fair value of our derivative financial instruments, and the impact on our consolidated balance sheet, see
Note 7A. Financial Instruments: Selected Financial Assets and Liabilities. Certain of our derivative instruments are covered by
associated credit-support agreements that have credit-risk-related contingent features designed to reduce our counterparties’
exposure to our risk of defaulting on amounts owed. The aggregate fair value of these derivative instruments that are in a liability
position is $502 million, for which we have posted collateral of $555 million in the normal course of business. These features include
the requirement to pay additional collateral in the event of a downgrade in our debt ratings. If there had been a downgrade to below
an A rating by S&P or the equivalent rating by Moody’s Investors Service, on December 31, 2011, we would have been required to
post an additional $46 million of collateral to our counterparties. The collateral advanced receivables are reported in Cash and cash
equivalents.
F. Credit Risk
On an ongoing basis, we review the creditworthiness of counterparties to our foreign exchange and interest rate agreements and do
not expect to incur a significant 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. As of December 31, 2011, we had
$2.8 billion due from a well-diversified, highly rated group (S&P ratings of mostly A+ or better) of bank counterparties around the
world. See Note 7B. Financial Instruments: Investment in Debt Securities for a distribution of our investments.
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, our credit rating and the credit rating of the counterparty. As of December 31, 2011, we
received cash collateral of $491 million against various counterparties. The collateral primarily supports the approximate fair value of
our derivative contracts. With respect to the collateral received, the obligations are reported in Short-term borrowings, including
current portion of long-term debt.
2011 Financial Report 81