Cardinal Health 2009 Annual Report Download - page 95

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assets and liabilities of these foreign subsidiaries into U.S. dollars are accumulated in shareholders’ equity
through other comprehensive income utilizing period-end exchange rates. Foreign currency translation recorded
in accumulated other comprehensive income was $96.2 million and $218.7 million at June 30, 2009 and 2008,
respectively. Foreign currency transaction gains and (losses) calculated by utilizing weighted average exchange
rates for the period are included in the consolidated statements of earnings in interest expense and other and were
$22.2 million, $(8.6) million and $(1.6) million for the fiscal years ended June 30, 2009, 2008 and 2007,
respectively.
Interest Rate and Currency Risk Management. The Company accounts for derivative instruments in
accordance with SFAS No. 133, as amended, “Accounting for Derivative Instruments and Hedging Activity.”
Under this standard, all derivative instruments are recorded at fair value on the balance sheet and all changes in
fair value are recorded to net earnings or shareholders’ equity through other comprehensive income, net of tax.
The Company uses forward currency exchange contracts and interest rate swaps to manage its exposures to
the variability of cash flows primarily related to the foreign exchange rate changes of future foreign currency
transaction costs and to the interest rate changes on borrowing costs. These contracts are designated as cash flow
hedges.
The Company also uses interest rate swaps to hedge changes in the value of fixed rate debt due to variations
in interest rates. Both the derivative instruments and underlying debt are adjusted to market value through
interest expense and other at the end of each period. The Company uses foreign currency forward contracts to
protect the value of existing foreign currency assets and liabilities. The remeasurement adjustments for any
foreign currency denominated assets or liabilities are included in interest expense and other. The remeasurement
adjustment is offset by the foreign currency forward contract settlements which are also classified in interest
expense and other. The interest rate swaps and foreign currency forward contracts are designated as fair value
hedges.
Certain of the Company’s derivative contracts are adjusted to current market values each period and qualify
for hedge accounting under SFAS No. 133, as amended. Periodic gains and losses of contracts designated as cash
flow hedges are deferred in other comprehensive income until the underlying transactions are recognized. Upon
recognition, such gains and losses are recorded in net earnings as an adjustment to the carrying amounts of
underlying transactions in the period in which these transactions are recognized. For those contracts designated
as fair value hedges, resulting gains or losses are recognized in net earnings offsetting the exposures of
underlying transactions. Carrying values of all contracts are included in other assets or liabilities.
The Company’s policy requires that contracts used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at the inception of the contract.
Hedging effectiveness is assessed periodically. Any contract not designated as a hedge, or so designated but
ineffective, is adjusted to market value and recognized in net earnings immediately. If a fair value or cash flow
hedge ceases to qualify for hedge accounting or is terminated, the contract would continue to be carried on the
balance sheet at fair value until settled and future adjustments to the contract’s fair value would be recognized in
earnings immediately. If a forecasted transaction was no longer probable to occur, amounts previously deferred
in other comprehensive income would be recognized immediately in earnings. Additional disclosure related to
the Company’s hedging contracts is provided in Note 13.
Earnings per Common Share. Basic earnings per Common Share (“Basic EPS”) is computed by dividing net
earnings (the numerator) by the weighted average number of Common Shares outstanding during each period
(the denominator). Diluted earnings per Common Share (“Diluted EPS”) is similar to the computation for Basic
EPS, except that the denominator is increased by the dilutive effect of vested and unvested stock options,
restricted shares and restricted share units computed using the treasury stock method.
Recent Financial Accounting Standards. In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in GAAP
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