Audiovox 2003 Annual Report Download - page 87

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AUDIOVOX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
November 30, 2001, 2002 and 2003
(Dollars in thousands, except share and per share data)
(i) Derivative Financial Instruments
The Company accounts for derivatives and hedging activities under the
provisions of Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities",
as amended (Statement 133). Statement 133 requires the recognition of
all derivative financial instruments as either assets or liabilities
in the statements of financial condition and measurement of those
instruments at fair value. Changes in the fair values of those
derivatives are reported in earnings or other comprehensive income
(loss) depending on the designation of the derivative and whether it
qualifies for hedge accounting. The accounting for gains and losses
associated with changes in the fair value of a derivative and the
effect on the consolidated financial statements will depend on its
hedge designation and whether the hedge is highly effective in
achieving offsetting changes in the fair value or cash flows of the
asset or liability hedged. Under the provisions of Statement 133, the
method that will be used for assessing the effectiveness of a hedging
derivative, as well as the measurement approach for determining the
ineffective aspects of the hedge, must be established at the inception
of the hedged instrument.
The Company's evaluations of hedge effectiveness are subject to
assumptions based on the terms and timing of the underlying exposures.
For a fair value hedge, both the effective and ineffective portions of
the change in fair value of the derivative instrument, along with an
adjustment to the carrying amount of the hedge item for fair value
changes attributable to the hedge risk, are recognized in earnings.
For a cash flow hedge, changes in the fair value of a derivative
instrument that is highly effective are deferred in accumulated other
comprehensive income or loss until the underlying hedged item is
recognized in earnings. The ineffective portion is recognized in
earnings immediately. If a fair value or cash flow hedge was to cease
to qualify for hedge accounting or be terminated, it would continue to
be carried on the balance sheet at fair value until settled, but hedge
accounting would be discontinued prospectively. If a forecasted
transaction were no longer probable of occurring, amounts previously
deferred in accumulated other comprehensive income would be recognized
immediately in earnings.
The Company, as a policy, does not use derivative financial
instruments for trading purposes. The Company conducts business in
several foreign currencies and, as a result, is subject to foreign
currency exchange rate risk due to the effects that exchange rate
movements of these currencies have on the Company's costs. To minimize
the effect of exchange rate fluctuations on costs, the Company enters
into forward exchange rate contracts. The Company, as a policy, does
not enter into forward exchange contracts for trading purposes. The
forward exchange rate contracts are entered into as hedges of
(Continued)
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