Visa 2011 Annual Report Download - page 111

Table of Contents
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2011
(in millions, except as noted)
following 12 months. The aggregate notional amount of the Company's foreign currency forward contracts outstanding in its exchange rate risk management
program was $651 million and $627 million at September 30, 2011 and 2010, respectively. The aggregate notional amount of $651 million outstanding at
September 30, 2011 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, 2011, the Company's
cash flow hedges in an asset position totaled $30 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 $7 million and are classified in accrued liabilities on the consolidated balance sheet. See Note 4—Fair
Value Measurements and Investments.
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 uses regression analysis to assess effectiveness prospectively and retrospectively. 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. Forward points are excluded for effectiveness testing and measurement purposes. The excluded forward points are reported in earnings. For fiscal
2011, 2010 and 2009, the amount by which earnings were reduced relating to excluded forward points was $20 million, $17 million and $14 million,
respectively.
The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded as a component of accumulated other
comprehensive income (loss) on the consolidated balance sheets. When the forecasted transaction occurs and is recognized in earnings, the amount in
accumulated other comprehensive income (loss) related to that hedge is reclassified to operating revenue or expense. The Company expects to reclassify $18
million pre-tax, the entire balance in accumulated other comprehensive income, net at September 30, 2011, to earnings during fiscal 2012.
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 occur, the related gains and losses on the cash flow hedges are reclassified from accumulated other
comprehensive income on the consolidated balance sheet to general and administrative expense on the consolidated statement of operations at that time. For
fiscal 2011, 2010 and 2009, the amount by which earnings were reduced relating to ineffectiveness was less than $1 million, $1 million and $4 million,
respectively.
The Company's derivative financial instruments are subject to both credit and market risk. The Company monitors the credit-worthiness of the financial
institutions that are counterparties to its derivative financial instruments and does not consider the risks of counterparty nonperformance to be significant. The
Company has begun to partially mitigate this risk by entering into agreements, with certain counterparties, which require each party to post collateral against
its net liability position with the counterparty. As of September 30, 2011, the Company has posted and received collateral of
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