Cisco 2010 Annual Report Download - page 64

Notes to Consolidated Financial Statements
The effects of the Company’s cash flow hedging instruments on other comprehensive income (OCI) and the Consolidated
Statements of Operations are summarized as follows (in millions):
GAINS (LOSSES) RECOGNIZED IN OCI ON DERIVATIVES FOR
THE YEARS ENDED (EFFECTIVE PORTION)
GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME FOR
THE YEARS ENDED (EFFECTIVE PORTION)
Derivatives Designated as Cash Flow Hedging Instruments July 31, 2010 July 25, 2009 Line Item in Statements of Operations July 31, 2010 July 25, 2009
Foreign currency derivatives $33 $ (116) Operating expenses $(1) $ (95)
Cost of sales-service —(13)
Interest rate derivatives 23 (42) Interest expense — —
Other derivatives —(2) Operating expenses —(2)
Total $56 $ (160) $(1) $ (110)
During the years ended July 31, 2010 and July 25, 2009, the amounts recognized in earnings on derivative instruments designated
as cash flow hedges related to the ineffective portion were not material, and the Company did not exclude any component of the
changes in fair value of the derivative instruments from the assessment of hedge effectiveness. As of July 31, 2010, the Company
estimates that approximately $40 million of net derivative gains related to its cash flow hedges included in AOCI will be reclassified
into earnings within the next 12 months.
The effect on the Consolidated Statements of Operations of derivative instruments designated as fair value hedges is
summarized as follows (in millions):
GAINS (LOSSES) FOR THE
YEARS ENDED
Derivatives Designated as Fair Value Hedging Instruments Line Item in Statements of Operations July 31, 2010 July 25, 2009
Equity derivatives Other income (loss), net $3 $97
Interest rate derivatives Other income (loss), net —(7)
Interest rate derivatives Interest expense 72 —
Total $75 $90
The effect on the Consolidated Statements of Operations of derivative instruments not designated as hedges is summarized as
follows (in millions):
GAINS (LOSSES) FOR THE
YEARS ENDED
Derivatives not Designated as Hedging Instruments Line Item in Statements of Operations July 31, 2010 July 25, 2009
Foreign currency derivatives Other income (loss), net $ (100) $1
Equity derivatives Operating expenses 18 (14)
Equity derivatives Other income (loss), net 12 11
Total $ (70) $ (2)
(b) Foreign Currency Exchange Risk
The Company conducts business globally in numerous currencies. Therefore, it is exposed to adverse movements in foreign
currency exchange rates. To limit the exposure related to foreign currency changes, the Company enters into foreign currency
contracts. The Company does not enter into such contracts for trading purposes.
The Company hedges foreign currency forecasted transactions related to certain operating expenses and service cost of sales
with currency options and forward contracts. These currency option and forward contracts, designated as cash flow hedges,
generally have maturities of less than 18 months. The Company assesses effectiveness based on changes in total fair value of the
derivatives. The effective portion of the derivative instrument’s gain or loss is initially reported as a component of AOCI and
subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the gain or
loss is reported in earnings immediately. The Company did not discontinue any hedges during any of the periods presented
because it was probable that the original forecasted transaction would not occur.
62 Cisco Systems, Inc.