Texas Instruments 2012 Annual Report Download - page 53

ANNUAL
REPORT
TEXAS INSTRUMENTS 2012 ANNUAL REPORT • 51
Changes in accounting standards
As of December 31, 2012, the Financial Accounting Standards Board had issued several accounting standards that we have not yet
been required to adopt. None of these standards would have a material effect on our financial condition, results of operations or
financial disclosures.
Off-balance sheet arrangements
As of December 31, 2012, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Commitments and contingencies
See Note 13 to the financial statements for a discussion of our commitments and contingencies.
Quantitative and qualitative disclosures about market risk
Foreign exchange risk
The U.S. dollar is the functional currency for financial reporting. We use forward currency exchange contracts to reduce the earnings
impact exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. For example, at year-end 2012, we
had forward currency exchange contracts outstanding with a notional value of $305 million to hedge net balance sheet exposures
(including $140 million to sell Japanese yen, $26 million to sell Chinese yuan and $26 million to sell British pound sterling). Similar
hedging activities existed at year-end 2011.
Because most of the aggregate non-U.S. dollar balance sheet exposure is hedged by these forward currency exchange contracts,
based on year-end 2012 balances and currency exchange rates, a hypothetical 10 percent plus or minus fluctuation in non-U.S.
currency exchange rates would result in a pre-tax currency exchange gain or loss of approximately $1 million.
Interest rate risk
We have the following potential exposure to changes in interest rates: (1) the effect of changes in interest rates on the fair value of our
investments in cash equivalents and short-term investments, which could produce a gain or a loss; and (2) the effect of changes in
interest rates on the fair value of our debt and an associated interest rate swap.
As of December 31, 2012, a hypothetical 100 basis point increase in interest rates would decrease the fair value of our investments
in cash equivalents and short-term investments by $13 million and decrease the fair value of our long-term debt and the associated
interest rate swap by $140 million. Because interest rates on our long-term debt are fixed or have been swapped to fixed rates, changes
in interest rates would not affect the cash flows associated with long-term debt.
Equity risk
Long-term investments at year-end 2012 include the following:
•฀ ฀Investments฀in฀mutual฀funds฀–฀includes฀mutual฀funds฀that฀were฀selected฀to฀generate฀returns฀that฀offset฀changes฀in฀certain฀
liabilities related to deferred compensation arrangements. The mutual funds hold a variety of debt and equity investments.
•฀ ฀Investments฀in฀venture฀capital฀funds฀–฀includes฀investments฀in฀limited฀partnerships฀(accounted฀for฀under฀either฀the฀equity฀or฀
cost method).
•฀ ฀Equity฀investments฀–฀includes฀non-marketable฀(non-publicly฀traded)฀equity฀securities.
Investments in mutual funds are stated at fair value. Changes in prices of the mutual fund investments are expected to offset related
changes in deferred compensation liabilities such that a 10 percent increase or decrease in the investments’ fair values would not
materially affect operating results. Non-marketable equity securities and some venture capital funds are stated at cost. Impairments
deemed to be other-than-temporary are expensed in net income. Investments in the remaining venture capital funds are stated using
the equity method. See Note 9 to the financial statements for details of equity and other long-term investments.