SanDisk 2014 Annual Report Download - page 158

SANDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Derivatives and Hedging Activities
The Company uses derivative instruments primarily to manage exposures to foreign currency. The
Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and
cash flows associated with changes in foreign currency. The program is not designated for trading or
speculative purposes. The Company’s derivative instruments expose the Company to credit risk to the
extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to
mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk
across several major financial institutions. In addition, the potential risk of loss with any one counterparty
resulting from this type of credit risk is monitored by the Company on an ongoing basis.
The Company recognizes derivative instruments as either assets or liabilities on the balance sheet at
fair value and provides qualitative disclosures about objectives and strategies for using derivative
instruments, quantitative disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative agreements.
Changes in fair value (i.e., gains or losses) of the derivatives are recorded as cost of revenue, operating
expense, other income (expense), or as other comprehensive income (‘‘OCI’’). Under certain provisions
and conditions within agreements with counterparties to the Company’s foreign exchange forward
contracts, subject to applicable requirements, the Company has the right of set-off associated with the
Company’s foreign exchange forward contracts and is allowed to net settle transactions of the same
currency with a single net amount payable by one party to the other. The Company does not offset or net
the fair value amounts of derivative instruments in its Consolidated Balance Sheets and separately
discloses the gross fair value amounts of the derivative instruments as either assets or liabilities.
Cash Flow Hedges. The Company uses foreign exchange forward contracts designated as cash flow
hedges to hedge a portion of future forecasted wafer purchases and R&D expenses in Japanese yen. The
gain or loss on the effective portion of a cash flow hedge is initially reported as a component of AOCI and
subsequently reclassified into cost of revenue or R&D expense in the same period or periods in which the
cost of revenue or R&D expense are recognized, or reclassified into other income (expense) if the hedged
transaction becomes probable of not occurring. Any gain or loss after a hedge is no longer designated,
because it is no longer probable of occurring or related to an ineffective portion of a cash flow hedge, as
well as any amount excluded from the Company’s hedge effectiveness, is recognized immediately as other
income (expense). As of December 28, 2014, the notional amount and unrealized loss on the effective
portion of the Company’s outstanding foreign exchange forward contracts to purchase Japanese yen that
are designated as cash flow hedges are shown in both Japanese yen (in billions) and U.S. dollar (in
thousands), based upon the exchange rate at December 28, 2014, as follows:
Unrealized
Notional Amount Loss
(Japanese yen) (U.S. dollar) (U.S. dollar)
Foreign exchange forward contracts ..................... ¥ 12.5 $ 103,826 $ (1,472)
As of December 28, 2014, the maturities of these contracts were two months or less.
Other Derivatives. Other derivatives that are non-designated consist primarily of foreign exchange
forward contracts to minimize the risk associated with the foreign exchange effects of revaluing monetary
assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and the associated
outstanding foreign exchange forward contracts were marked-to-market at December 28, 2014 with
realized and unrealized gains and losses included in other income (expense). As of December 28, 2014, the
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