Pizza Hut 2010 Annual Report Download - page 188

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Note 12 – Derivative Instruments
The Company is exposed to certain market risks relating to its ongoing business operations. The primary market risks
managed by using derivative instruments are interest rate risk and cash flow volatility arising from foreign currency
fluctuations.
We enter into interest rate swaps with the objective of reducing our exposure to interest rate risk and lowering interest
expense for a portion of our fixed-rate debt. At December 25, 2010, our interest rate derivative instruments outstanding
had notional amounts of $925 million and have been designated as fair value hedges of a portion of our debt. The critical
terms of these swaps, including reset dates and floating rate indices match those of our underlying fixed-rate debt and no
ineffectiveness has been recorded.
We enter into foreign currency forward contracts with the objective of reducing our exposure to cash flow volatility
arising from foreign currency fluctuations associated with certain foreign currency denominated intercompany short-term
receivables and payables. The notional amount, maturity date, and currency of these contracts match those of the
underlying receivables or payables. For those foreign currency exchange forward contracts that we have designated as
cash flow hedges, we measure ineffectiveness by comparing the cumulative change in the fair value of the forward
contract with the cumulative change in the fair value of the hedged item. At December 25, 2010, foreign currency
forward contracts outstanding had a total notional amount of $390 million.
The fair values of derivatives designated as hedging instruments for the years ended December 25, 2010 and December
26, 2009 were:
Fair Value Consolidated Balance Sheet Location
2010 2009
Interest Rate Swaps - Asset $ 8 $
— Prepaid expenses and other current assets
Interest Rate Swaps - Asset 33
44 Other assets
Foreign Currency Forwards - Asset 7 6 Prepaid expenses and other current assets
Foreign Currency Forwards - Liability
(
3
)
(
3
)
Accounts payable and other current liabilities
Total $ 45 $ 47
The unrealized gains associated with our interest rate swaps that hedge the interest rate risk for a portion of our debt have
been reported as an addition of $5 million and $26 million to Short-term borrowings and Long-term debt, respectively at
December 25, 2010 and $36 million to Long-term debt at December 26, 2009. During the years ended December 25,
2010 and December 26, 2009, Interest expense, net was reduced by $33 million and $31 million, respectively for
recognized gains on these interest rate swaps.
Form 10-K