Xerox 2002 Annual Report Download - page 72

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are intended to economically hedge foreign currency
risks to the extent possible, differences between the
contract terms of our derivatives and the underlying
forecasted exposures reduce our ability to obtain
hedge accounting in accordance with SFAS No. 133.
Accordingly, the changes in value for a majority
of these derivatives are recorded directly through
earnings.
During 2002, 2001 and 2000, we recorded
aggregate exchange losses of $77 and gains of $29
and $103, respectively. This reflects the changes in
the values of all our foreign currency derivatives, for
which we did not apply hedge accounting, together
with exchange gains and losses on foreign currency
underlying assets and liabilities.
At December 31, 2002 and 2001, we had outstand-
ing forward exchange and purchased option contracts
with gross notional values of $3,319 and $3,900,
respectively. The net asset (liability) fair values of our
currency derivatives at December 31, 2002 and 2001
Reclass to
Opening Transition Net Statement of Closing
For the Year Ended December 31, 2002 Balance Gains (Losses) Gains (Losses) Operations* Balance
Variable Interest Paid $(15) $ – $ – 15 $ –
Foreign Currency Interest Payments (2) – (1) 1 (2)
Pre-tax Subtotal (17) – (1) 16 (2)
Tax Expense 8 – – (7) 1
Fuji Xerox, net 2 – – (2) –
Total $ (7) $ – $(1) 7 $ (1)
For the Year Ended December 31, 2001
Variable Interest Paid $ – $(35) $ – $ 20 $(15)
Inventory Purchases – – (5) 5 –
Foreign Currency Interest Payments – – (4) 2 (2)
Pre-tax Subtotal – (35) (9) 27 (17)
Tax Expense – 14 4 (10) 8
Fuji Xerox, net – 2 – – 2
Total $ – $(19) $(5) $ 17 $ (7)
* Includes reclassification of $7 in 2002 and $12 in 2001 of the after-tax transition loss of $19.
were $(50) and $8, respectively. The following is a
summary of the primary hedging positions held as
of December 31, 2002:
Gross Fair Value
Notional Asset/
Currency Hedged (Buy/Sell) Value (Liability)
US Dollar/Euro $ 791 $(45)
Euro/Pound Sterling 730 5
Yen/US Dollar 584 4
Pound Sterling/Euro 360 (7)
Canadian Dollar/Euro 109 (14)
US Dollar/Brazilian Real 104 6
US Dollar/Canadian Dollar 90 1
Yen/Pound Sterling 89 2
All Other 462 (2)
Total $3,319 $(50)
Accumulated Other Comprehensive Income (“AOCI”):
The following is a summary of changes in AOCI
resulting from the application of SFAS No. 133 during
2002 and 2001:
During 2002 and 2001, certain forward contracts
used to hedge Euro denominated interest payments
were designated and accounted for as cash flow
hedges. Accordingly, the change in value of these
derivatives is included in the rollforward of AOCI
above. No amount of ineffectiveness was recorded to
the Consolidated Statements of Income during 2002
or 2001 for our designated cash flow hedges and all
components of each derivatives gain or loss are
included in the assessment of hedge effectiveness.
The amount reclassified to earnings during 2001 and
2002 represents the recognition of deferred gains or
losses along with the underlying hedged transactions.
Net Investment Hedges: We also utilize derivative
instruments and non-derivative financial instruments
to hedge against the potentially adverse impacts of
foreign currency fluctuations on certain of our invest-
ments in foreign entities. During 2001, $18 of net after-
tax gains related to hedges of our net investments in
Xerox Brazil and Fuji Xerox were recorded in the cumu-
lative translation adjustments account. The amounts
recorded during 2002 were less than $1.
Fair Value of Financial Instruments: The estimated fair
values of our financial instruments at December 31,
2002 and 2001 follow: