Baker Hughes 2013 Annual Report Download - page 84

2013 Annual Report 54
Baker Hughes Incorporated
Notes to Consolidated Financial Statements
site. This share is based on the ratio of the estimated volume of waste we contributed to the site to the total volume
of waste disposed at the site.
Foreign Currency
A number of our significant foreign subsidiaries have designated the local currency as their functional currency
and, as such, gains and losses resulting from balance sheet translation of foreign operations are included as a
separate component of accumulated other comprehensive loss within stockholders’ equity. Gains and losses from
foreign currency transactions, such as those resulting from the settlement of receivables or payables in the non-
functional currency, are included in marketing, general and administrative (“MG&A”) expenses in the consolidated
statements of income as incurred. For those foreign subsidiaries that have designated the U.S. Dollar as the
functional currency, monetary assets and liabilities are remeasured at period-end exchange rates, and nonmonetary
items are remeasured at historical exchange rates. Gains and losses resulting from this balance sheet
remeasurement are also included in MG&A expenses in the consolidated statements of income as incurred.
In February 2013, Venezuela's currency was devalued from the prior exchange rate of 4.3 Bolivars Fuertes per
U.S. Dollar to 6.3 Bolivars Fuertes per U.S. Dollar, which applies to our local currency denominated balances. The
impact of this devaluation was a loss of $23 million that was recorded in marketing, general and administrative
expense in the first quarter of 2013.
Financial Instruments
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, debt, and
derivative financial instruments. Except for debt, the estimated fair value of our financial instruments at
December 31, 2013 and 2012 approximates their carrying value as reflected in our consolidated balance sheets.
For further information on the fair value of our debt, see Note 8. Indebtedness.
We monitor our exposure to various business risks including commodity prices, foreign currency exchange
rates and interest rates and regularly use derivative financial instruments to manage these risks. Our policies do
not permit the use of derivative financial instruments for speculative purposes. At the inception of a new derivative,
we designate the derivative as a hedge or we determine the derivative to be undesignated as a hedging instrument
as the facts dictate. We document the relationships between the hedging instruments and the hedged items, as
well as our risk management objectives and strategy for undertaking various hedge transactions. We assess
whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows
of the hedged item at both the inception of the hedge and on an ongoing basis.
We have a program that primarily utilizes foreign currency forward contracts to reduce the risks associated with
the effects of certain foreign currency exposures. Under this program, our strategy is to have gains or losses on the
foreign currency forward contracts mitigate the foreign currency transaction and translation gains or losses to the
extent practical. These foreign currency exposures typically arise from changes in the value of assets and liabilities
which are denominated in currencies other than the functional currency. Our foreign currency forward contracts
generally settle in less than 180 days. We record all derivatives as of the end of our reporting period in our
consolidated balance sheet at fair value. For those forward contracts designated as fair value hedging instruments
or held as undesignated hedging instruments, we record changes in fair value in our consolidated statements of
income along with the change in fair value of the hedged item. Changes in the fair value of forward contracts
designated as cash flow hedging instruments are recognized in other comprehensive income until the hedged item
is recognized in earnings. For derivatives designated as a cash flow hedge, the ineffective portion of that
derivative's change in fair value is recognized in earnings. Recognized gains and losses on derivatives entered into
to manage foreign currency exchange risk are included in MG&A expenses in the consolidated statements of
income.
We had outstanding foreign currency forward contracts with notional amounts aggregating $486 million and
$207 million to hedge exposure to currency fluctuations in various foreign currencies at December 31, 2013 and
2012, respectively. These contracts are either undesignated hedging instruments or designated and qualify as fair
value hedging instruments. The fair value was determined using quoted market prices for contracts with similar
terms and maturity dates and was not material at either December 31, 2013 or 2012. The effects of our derivative