Pottery Barn 2014 Annual Report Download - page 70

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Cash Flow Hedges
We enter into foreign currency forward contracts designated as cash flow hedges for forecasted inventory
purchases in U.S. dollars by our foreign subsidiaries. These hedges generally have terms of up to 12 months. All
hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign
currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our
cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted
inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to
the customer, we reclassify amounts previously recorded in OCI to cost of goods sold. Changes in the fair value
of the forward contract related to interest charges or “forward points” are excluded from the assessment and
measurement of hedge effectiveness and are recorded immediately in other income (expense), net. Based on the
rates in effect as of February 1, 2015, we expect to reclassify a net gain of approximately $1,321,000 from OCI
to cost of goods sold over the next 12 months.
We also enter into non-designated foreign currency forward contracts to reduce the exchange risk associated with
our assets and liabilities denominated in a foreign currency. Any foreign exchange gains (losses) related to these
contracts are recognized in other income (expense), net.
As of February 1, 2015, and February 2, 2014, we had foreign currency forward contracts outstanding (in U.S.
dollars) as follows:
In thousands Feb. 1, 2015 Feb. 2, 2014
Contracts to sell Canadian dollars and buy U.S. dollars
Contracts designated as cash flow hedges $ 15,900 $ 16,500
Contracts not designated as cash flow hedges 1$ 0 $ 3,500
Contracts to sell Australian dollars and buy U.S. dollars
Contracts not designated as cash flow hedges $ 21,000 $ 5,500
1These contracts are no longer designated as cash flow hedges as the related inventory purchases have occurred.
Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using
regression analysis. Any measureable ineffectiveness of the hedge is recorded in other income (expense), net.
During fiscal 2014 and fiscal 2013, no gain or loss was recognized for cash flow hedges due to hedge
ineffectiveness. All hedges were deemed effective for assessment purposes as of February 1, 2015 and
February 2, 2014.
The effect of derivative instruments in our Consolidated Financial Statements, pre tax, was as follows:
In thousands
Fiscal 2014
(52 Weeks)
Fiscal 2013
(52 Weeks)
Net gain recognized in OCI $ 1,153 $ 870
Net gain reclassified from OCI into cost of goods sold $ 573 $ 129
Net foreign exchange gain (loss) recognized in other income (expense):
Instruments designated as cash flow hedges1$ (155) $ (109)
Instruments not designated or de-designated2$ (1,795) $ 906
1Changes in fair value of the forward contract related to interest charges or “forward points.”
2Changes in fair value subsequent to de-designation for instruments no longer designated as cash flow hedges, and changes
in fair value related to instruments not designated as cash flow hedges.
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