Callaway 2005 Annual Report Download - page 89

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk
management policies. Pursuant to its foreign exchange hedging policy, the Company may hedge anticipated
transactions and the related receivables and payables denominated in foreign currencies using forward foreign
currency exchange rate contracts and put or call options. Foreign currency derivatives are used only to meet the
Company’s objectives of minimizing variability in the Company’s operating results arising from foreign
exchange rate movements. The Company does not enter into foreign exchange contracts for speculative purposes.
Hedging contracts mature within 12 months from their inception.
At December 31, 2005, 2004 and 2003, the notional amounts of the Company’s foreign exchange contracts
were approximately $35,624,000, $52,736,000 and $91,222,000, respectively. The Company estimates the fair
values of derivatives based on quoted market prices or pricing models using current market rates and records all
derivatives on the balance sheet at fair value. At December 31, 2005, current assets and current liabilities related
to the fair value of foreign currency-related derivatives were $512,000 and $511,000, respectively. At
December 31, 2004, current liabilities related to the fair value of foreign currency-related derivatives were
$2,981,000. There were no current assets related to the fair values of foreign currency-related derivatives as of
December 31, 2004.
At December 31, 2005, 2004 and 2003, the notional amounts of the Company’s foreign exchange contracts
used to hedge outstanding balance sheet exposures were approximately $35,624,000, $52,736,000 and
$46,779,000, respectively. The gains and losses on foreign currency contracts used to hedge balance sheet
exposures are recognized as a component of interest and other income in the same period as the remeasurement
gain and loss of the related foreign currency denominated assets and liabilities and thus offset these gains and
losses. During the years ended December 31, 2005, 2004 and 2003, the Company recorded net gains of
$4,222,000 and net losses of $4,577,000 and $6,838,000, respectively, due to net realized and unrealized gains
and losses on contracts used to hedge balance sheet exposures.
At December 31, 2005 and 2004 there were no outstanding foreign exchange contracts designated as cash
flow hedges. At December 31, 2003, the notional amounts of the Company’s foreign exchange contracts
designated as cash flow hedges were approximately $44,443,000. For derivative instruments that are designated
and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is initially
recorded in accumulated other comprehensive income as a separate component of shareholders’ equity and
subsequently reclassified into earnings in the period during which the hedged transaction is recognized.
During the years ended December 31, 2005, 2004 and 2003, no gains or losses were reclassified into
earnings as a result of the discontinuance of cash flow hedges.
The ineffective portion of the gain or loss for derivative instruments that are designated and qualify as cash
flow hedges is immediately reported as a component of interest and other income. For foreign currency contracts
designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward
differential are excluded from the test of hedging effectiveness and are recorded currently in earnings as a
component of interest and other income. During the years ended December 31, 2005, 2004 and 2003, the
Company recorded net gains (losses) of $0, $103,000 loss and $38,000 gain, respectively, as a result of changes
in the spot-forward differential. Assessments of hedge effectiveness are performed using the dollar offset method
and applying a hedge effectiveness ratio between 80% and 125%. Given that both the hedged item and the
hedging instrument are evaluated using the same spot rate, the Company anticipates the hedges to be highly
effective. The effectiveness of each derivative is assessed quarterly.
F-21