Toro 2014 Annual Report Download - page 72

the amount of exposure to the currency involved and an assess- cash flows of the hedged transactions and whether those deriva-
ment of the near-term market value for each currency. The com- tives may be expected to remain highly effective in future periods.
pany’s policy does not allow the use of derivatives for trading or When it is determined that a derivative is not, or has ceased to be,
speculative purposes. The company also made an accounting pol- highly effective as a hedge, the company discontinues hedge
icy election to use the portfolio exception with respect to measur- accounting prospectively. When the company discontinues hedge
ing counterparty credit risk for derivative instruments, and to mea- accounting because it is no longer probable, but it is still reasona-
sure the fair value of a portfolio of financial assets and financial bly possible that the forecasted transaction will occur by the end of
liabilities on the basis of the net open risk position with each the originally expected period or within an additional two-month
counterparty. The company’s primary currency exchange rate period of time thereafter, the gain or loss on the derivative remains
exposures are with the Euro, the Australian dollar, the Canadian in AOCL and is reclassified to net earnings when the forecasted
dollar, the British pound, the Mexican peso, the Japanese yen, the transaction affects net earnings. However, if it is probable that a
Chinese Renminbi, and the Romanian New Leu against the U.S. forecasted transaction will not occur by the end of the originally
dollar, as well as the Romanian New Leu against the Euro. specified time period or within an additional two-month period of
time thereafter, the gains and losses that were in AOCL are recog-
Cash Flow Hedges. The company recognizes all derivative nized immediately in net earnings. In all situations in which hedge
instruments as either assets or liabilities at fair value on the con- accounting is discontinued and the derivative remains outstanding,
solidated balance sheet and formally documents relationships the company carries the derivative at its fair value on the consoli-
between cash flow hedging instruments and hedged transactions, dated balance sheet, recognizing future changes in the fair value
as well as its risk-management objective and strategy for undertak- in other income, net. For the fiscal years ended October 31, 2014
ing hedge transactions. This process includes linking all derivatives and 2013, there were immaterial losses on contracts reclassified
to the forecasted transactions, such as sales to third parties and into earnings as a result of the discontinuance of cash flow
foreign plant operations. Changes in fair values of outstanding hedges. As of October 31, 2014, the notional amount of outstand-
cash flow hedge derivatives, except the ineffective portion, are ing forward contracts designated as cash flow hedges was
recorded in other comprehensive income (‘‘OCI’’), until net earn- $106,906. Additionally, the company has one cross currency inter-
ings is affected by the variability of cash flows of the hedged trans- est rate swap instrument outstanding as of October 31, 2014 for a
action. Gains and losses on the derivative representing either fixed pay notional of 36,593 Romanian New Leu and receive float-
hedge ineffectiveness or hedge components excluded from the ing notional of 8,500 Euro.
assessment of effectiveness are recognized in net earnings. The
consolidated statement of earnings classification of effective hedge Derivatives Not Designated as Hedging Instruments. The
results is the same as that of the underlying exposure. Results of company also enters into foreign currency contracts that include
hedges of sales and foreign plant operations are recorded in net forward currency contracts and cross currency swaps to mitigate
sales and cost of sales, respectively, when the underlying hedged the remeasurement of specific assets and liabilities on the consoli-
transaction affects net earnings. The maximum amount of time the dated balance sheet. These contracts are not designated as hedg-
company hedges its exposure to the variability in future cash flows ing instruments. Accordingly, changes in the fair value of hedges
for forecasted trade sales and purchases is two years. Results of of recorded balance sheet positions, such as cash, receivables,
hedges of intercompany loans are recorded in other income, net payables, intercompany notes, and other various contractual claims
as an offset to the remeasurement of the foreign loan balance. to pay or receive foreign currencies other than the functional cur-
The company formally assesses, at a hedge’s inception and on rency, are recognized immediately in other income, net, on the
an ongoing basis, whether the derivatives that are designated as consolidated statements of earnings together with the transaction
hedges have been highly effective in offsetting changes in the gain or loss from the hedged balance sheet position.
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