Xerox 2008 Annual Report Download - page 75

Notes to the Consolidated
Financial Statements
(in millions, except per share data and
unless otherwise indicated)
Cash Flow Hedges
During 2008, pay fixed/receive variable interest rate swaps with
notional amounts of $150 and a net liability fair value of $2 were
designated and accounted for as cash flow hedges. The swaps
were structured to hedge the LIBOR interest rate of the floating
Senior Notes due 2009 by converting it from a variable rate
instrument to a fixed rate instrument. No ineffective portion was
recorded to earnings during 2008 and all components of the
derivative gain or loss was included in the assessment of hedged
effectiveness.
Terminated Swaps
During the period from 2004 to 2008, we terminated several
interest rate swaps which had been designated as fair value
hedges of certain debt instruments. These terminated interest rate
swaps had an aggregate notional value of $4.2 billion including
$1.6 billion terminated in 2008. The associated net fair value
adjustments to the debt instruments are being amortized to
interest expense over the remaining term of the related notes. In
2008, 2007 and 2006, the amortization of these fair value
adjustments reduced interest expense by $12, $9 and $9,
respectively, and we expect to record a net decrease in interest
expense of $116 in future years through 2027.
Foreign Exchange Risk Management
We may use certain derivative instruments to manage the
exposures associated with the foreign currency exchange risks
discussed below.
Foreign Currency Denominated Assets and Liabilities
We generally utilize forward foreign exchange contracts and
purchased option contracts to hedge these exposures. Changes in
the value of these currency derivatives are recorded in earnings
together with the offsetting foreign exchange gains and losses on
the underlying assets and liabilities.
Forecasted Purchases and Sales in Foreign Currency
We generally utilize forward foreign exchange contracts and
purchased option contracts to hedge these anticipated
transactions. These contracts generally mature in six months or
less. A portion of these contracts are designated as cash-flow
hedges.
At December 31, 2008, we had outstanding forward exchange and
purchased option contracts with gross notional values of $2.6
billion which is reflective of the amounts that are normally
outstanding at any point during the year. The following is a
summary of the primary hedging positions and corresponding fair
values held as of December 31, 2008:
Currency Hedged (Buy/Sell)
Gross
Notional
Value
Fair Value
Asset
(Liability)(1)
U.K. Pound Sterling/Euro $ 628 $(85)
Euro/U.S. Dollar 555 3
U.S. Dollar/Euro 308 (6)
Swedish Kronor/Euro 112 (9)
Swiss Franc/Euro 184 4
Japanese Yen/U.S. Dollar 110 6
Japanese Yen/Euro 243 (8)
Euro/U.K. Pound Sterling 42 1
U.S. Dollar/Canadian Dollar 16 —
Canadian Dollar/Euro 149 2
Canadian Dollar/U.S. Dollar 73 1
All Other 180 (2)
Total $2,600 $(93)
(1) Represents the net receivable (payable) amount included in the Consolidated Balance
Sheet at December 31, 2008.
Cash Flow Hedges
We designate a portion of our foreign currency derivative contracts
as cash flow hedges of our foreign currency denominated
inventory purchases and sales. The changes in fair value for these
contracts were reported in Accumulated other comprehensive loss
and reclassified to Cost of sales and revenue in the period or
periods during which the related inventory was sold to a third party.
No amount of ineffectiveness was recorded in the Consolidated
Statements of Income for these designated cash flow hedges and
all components of each derivative’s gain or loss was included in the
assessment of hedge effectiveness. As of December 31, 2008, the
net liability fair value of these contracts was $1.
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