Visa 2009 Annual Report Download - page 101

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Table of Contents
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2009
(in millions, except as noted)
derivatives are recorded on the consolidated balance sheet at fair value in prepaid expenses and other current assets or accrued liabilities and the resulting
gains or losses from changes in fair value are accounted for depending on whether they are designated and qualify for hedge accounting.
The Company enters into forward contracts to hedge certain operational ("cash flow") exposures resulting from changes in foreign currency exchange
rates. Such cash flow exposures result from portions of forecasted revenues and expenses being denominated in or based on currencies other than USD. In
fiscal 2009 the Company implemented a rolling hedge strategy program. Under this strategy, the Company seeks to reduce the exchange rate risk from
forecasted net exposure of revenues derived from and payments made in foreign currencies during the immediately following 12 months. The aggregate
notional amount of the Company's foreign currency forward contracts outstanding in its exchange rate risk management program was $742 million and
$4 million, respectively, at September 30, 2009 and September 30, 2008. The aggregate notional amount of $742 million outstanding at September 30, 2009 is
fully consistent with the Company's strategy and treasury policy aimed at reducing foreign exchange risk below a predetermined and approved threshold.
However, actual results for this period could materially differ from the Company's forecast. As of September 30, 2009, the Company's cash flow hedges in an
asset position totaled $18 million and are classified in prepaid expenses and other current assets on the consolidated balance sheet, while cash flow hedges in a
liability position totaled $94 million and are classified in accrued liabilities on the consolidated balance sheet. See Note 5—Investments and Fair Value
Measurements.
To qualify for cash flow hedge accounting treatment, the Company formally documents, at inception of the hedge, all relationships between hedging
transactions and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also formally
assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items and
whether those derivatives may be expected to remain highly effective in future periods.
The Company assesses effectiveness prospectively using regression analysis and retrospectively using a dollar ratio test. The effectiveness tests are
performed on the foreign exchange forward contracts based on changes in the spot rate of the derivative instrument compared to changes in the spot rate of the
forecasted hedged transaction. The Company excludes time value for effectiveness testing and measurement purposes. The excluded time value is reported
immediately in earnings. For fiscal 2009 and 2008, the amount by which earnings were reduced relating to excluded time value and ineffectiveness was $18
million and $2 million, respectively.
The effective portion of changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of accumulated other
comprehensive income on the consolidated balance sheet. When the forecasted transaction occurs and is recognized in earnings, the amount in accumulated
other comprehensive income related to that hedge is reclassified to operating revenue or expense. The balance in accumulated other comprehensive income
was $58 million at September 30, 2009 and the Company expects to reclassify the entire amount as a reduction to earnings in the consolidated statement of
operations during fiscal 2010 and fiscal 2011 due to the recognition in earnings of the hedged forecasted transactions.
In the event there is recognized ineffectiveness or the underlying forecasted transaction does not occur within the designated hedge period, or it
becomes remote that the forecasted transaction will
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