Canon 2003 Annual Report Download - page 43

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41
Canon’s exposure to the market risk of changes in interest rates
relates primarily to its debt obligations. Fixed-rate debt obligations
expose Canon to variability in their fair values due to changes in
interest rates. To manage the variability in fair values caused by
interest rate changes, Canon enters into interest rate swaps when it
is determined to be appropriate based on market conditions. The
interest rate swaps change fixed-rate debt obligations to variable-
rate debt obligations by entering into receive-fixed, pay-variable
interest rate swaps. To a lesser extent, Canon has entered into
interest rate swaps that change variable-rate debt obligations to
fixed-rate debt obligations. The hedging relationship between
interest rate swaps and hedged debt obligations is highly effective in
achieving offsetting changes in fair values resulting from interest
rate risk.
The information about Canon’s derivative financial instruments
and other financial instruments that are sensitive to changes in
interest rates are shown on page 42. For debt obligations, the table
presents principal cash flows by expected maturity dates and
related weighted average interest rates. For interest rate swaps, the
table presents notional principal amounts by expected maturity
dates and weighted average interest rates. Notional principal
amounts are used to calculate the contractual payments to be
exchanged under the contracts. The table presents information for
obligations existing at December 31, 2003 together with the related
weighted average contractual interest rates at December 31, 2003.
Derivative financial instruments designated as fair value hedges
principally relate to interest rate swaps associated with fixed-rate
debt obligations. Changes in fair values of the hedged debt
obligations and derivative instruments designated as fair value
hedges of these debt obligations are recognized in other income
(deductions). There is no hedging ineffectiveness or net gains or
losses excluded from the assessment of hedge effectiveness for
fiscal 2003 as the critical terms of the interest rate swaps match the
terms of the hedged debt obligations.
Changes in the fair value of foreign exchange contracts
designated and qualifying as cash flow hedges of forecasted
intercompany sales are reported in accumulated other
comprehensive income (loss). These amounts are subsequently
reclassified into earnings through other income (deductions) in the
same period as the hedged items affect earnings. Substantially all
accumulated other comprehensive income (loss) at year-end is
expected to be recognized in earnings over the next twelve months.
Canon excludes the time value component of the hedging
instruments from the assessment of hedge effectiveness.
Canon has entered into certain foreign exchange contracts,
which do not meet the hedging criteria of Statement of Financial
Accounting Standards No. 133 (“SFAS 133”), “Accounting for
Derivative Instruments and Hedging Activities” and Statement of
Financial Accounting Standards No. 138 (“SFAS 138”),
“Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133”. Canon
records these foreign exchange contracts on the balance sheet at
fair value. The changes in fair values are recorded in earnings
immediately. The notional amounts of those foreign exchange
contracts were ¥408,540 million (U.S.$3,818 million) and
¥362,276 million at December 31, 2003 and 2002, respectively.
Canon has entered into certain interest rate swap agreements
which do not meet the hedging criteria of SFAS 133 and SFAS 138.
Canon records these interest rate swap agreements on the balance
sheet at fair value. The changes in fair values are recorded in
earnings immediately. The notional amount of those interest rate
swap agreements was ¥57,270 million at December 31, 2002.
Canon recognized net losses related to those interest rate swaps in
the amount of ¥94 million (U.S.$1 million), ¥1,738 million and
¥2,521 million for the years ended December 31, 2003, 2002 and
2001, respectively, and classified such amount in other income
(deductions).
Millions of yen
Forwards to sell foreign currencies:
U.S.$ euro Others Total
Contract amounts ¥ 232,013 191,537 23,993 447,543
Estimated fair value 3,623 (6,287) (132) (2,796)
Forwards to buy foreign currencies:
Contract amounts ¥ 11,151 3,261 7,972 22,384
Estimated fair value (35) (165) (941) (1,141)
Thousands of U.S. dollars
Forwards to sell foreign currencies:
U.S.$ euro Others Total
Contract amounts $ 2,168,346 1,790,065 224,234 4,182,645
Estimated fair value 33,860 (58,757) (1,234) (26,131)
Forwards to buy foreign currencies:
Contract amounts $ 104,215 30,476 74,505 209,196
Estimated fair value (327) (1,542) (8,795) (10,664)