Walgreens 2015 Annual Report Download - page 101

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The notional amounts, fair value and balance sheet presentation of derivative instruments outstanding as of
August 31, 2014, excluding warrants which are presented separately in this footnote, are as follows (in millions):
Notional
Fair
Value
Location in Consolidated
Balance Sheets
Derivatives designated as fair value hedges:
Interest rate swaps $1,000 $16 Other non-current assets
Derivatives designated as cash flow hedges:
Forward interest rate swaps 1,500 44 Other non-current liabilities
The Company uses interest rate swaps to manage the interest rate exposure associated with some of its fixed-rate
borrowings and designates them as fair value hedges. The Company uses forward starting interest rate swaps to
hedge its interest rate exposure of some of its anticipated debt issuances and designates them as cash flow
hedges.
The Company utilizes foreign currency forward contracts and other foreign currency derivatives to hedge
significant committed and highly probable future transactions and cash flows denominated in currencies other
than the functional currency of the Company or its subsidiaries. The Company has significant non-US dollar
denominated net investments and uses foreign currency denominated financial instruments, specifically foreign
currency derivatives and foreign currency denominated debt, to hedge its foreign currency risk.
Fair Value Hedges
The Company entered into a series of interest rate swaps, converting $750 million of its 5.250% fixed rate notes
to a floating interest rate based on the six-month LIBOR in arrears plus a constant spread and an interest rate
swap converting $250 million of its 5.250% fixed rate notes to a floating interest rate based on the one-month
LIBOR in arrears plus a constant spread. All swap termination dates coincide with the notes maturity date,
January 15, 2019. These swaps were designated as fair value hedges. On August 10, 2015, the Company
terminated $500 million of the six-month LIBOR in arrears swaps and all of the one-month LIBOR in arrears
swaps in connection with the repayment of the associated debt as described in Note 10, Short-Term Borrowings
and Long-Term Debt.
The gains and losses due to changes in fair value on the swaps and on the hedged notes attributable to interest
rate risk were recognized as follows (in millions):
Location in Consolidated Statements of Earnings 2015 2014 2013
Interest rate swaps Interest expense, net $(4) $(15) $ 63
Notes Interest expense, net 6 15 (43)
The changes in fair value of the Company’s debt that was swapped from fixed to variable rate and designated as
fair value hedges are included in short-term and long-term debt on the Consolidated Balance Sheets (see Note 10,
Short-Term Borrowings and Long-Term Debt). At August 31, 2015 and August 31, 2014, the cumulative fair
value adjustments resulted in an increase in long-term debt of $1 million and $12 million, respectively. No
material gains or losses were recorded from ineffectiveness during fiscal 2015, 2014 or 2013.
Cash Flow Hedges
In fiscal 2014, the Company entered into a series of forward starting interest rate swap transactions locking in the
then current three-month LIBOR interest rate on $1.5 billion of the then anticipated issuance of debt, with
expected maturity tenures of 10 and 30 years. The swap transactions were designated as cash flow hedges of the
variability in the expected cash outflows of interest payments on the then forecasted debt due to changes in the
benchmark interest rates. In November 2014, in conjunction with the issuance of the $2.0 billion notes maturing
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