Dow Chemical 2011 Annual Report Download - page 195

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liabilities and future cash flows with respect to exchange rate fluctuations. Assets and liabilities denominated in the same
foreign currency are netted, and only the net exposure is hedged. At December 31, 2011, the Company had forward contracts,
options and cross-currency swaps to buy, sell or exchange foreign currencies. These contracts had various expiration dates,
primarily in the first quarter of 2012.
Commodity Risk Management
The Company has exposure to the prices of commodities in its procurement of certain raw materials. The primary purpose of
commodity hedging activities is to manage the price volatility associated with these forecasted inventory purchases. At
December 31, 2011, the Company had futures contracts, options and swaps to buy, sell or exchange commodities. These
agreements had various expiration dates primarily in 2012.
Accounting for Derivative Instruments and Hedging Activities
Cash Flow Hedges
For derivatives that are designated and qualify as cash flow hedging instruments, the effective portion of the gain or loss on the
derivative is recorded in “Accumulated other comprehensive income (loss)” (“AOCI”); it is reclassified to “Cost of sales” in
the same period or periods that the hedged transaction affects income. The unrealized amounts in AOCI fluctuate based on
changes in the fair value of open contracts at the end of each reporting period. The Company anticipates volatility in AOCI and
net income from its cash flow hedges. The amount of volatility varies with the level of derivative activities and market
conditions during any period. Gains and losses on derivatives representing either hedge ineffectiveness or hedge components
excluded from the assessment of effectiveness are recognized in current period income.
The net loss from previously terminated interest rate cash flow hedges included in AOCI at December 31, 2011 was
$1 million after tax ($2 million after tax at December 31, 2010). During 2011, 2010 and 2009, there was no material impact on
the consolidated financial statements due to interest rate hedge ineffectiveness. At December 31, 2011 and 2010, the Company
had no open interest rate swaps designated as cash flow hedges.
Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions
until March 2012. The effective portion of the mark-to-market effects of the foreign currency forward contracts is recorded in
AOCI; it is reclassified to income in the same period or periods that the underlying feedstock purchase affects income. The net
gain from the foreign currency hedges included in AOCI at December 31, 2011 was $2 million after tax (net loss of $4 million
after tax at December 31, 2010). During 2011, 2010 and 2009, there was no material impact on the consolidated financial
statements due to foreign currency hedge ineffectiveness. At December 31, 2011, the Company had open forward contracts
with various expiration dates to buy, sell or exchange foreign currencies with a notional U.S. dollar equivalent of $432 million
($827 million at December 31, 2010).
Commodity swaps, futures and option contracts with maturities of not more than 36 months are utilized and designated as
cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December
2012. The effective portion of the mark-to-market effects of the cash flow hedge instruments is recorded in AOCI; it is
reclassified to income in the same period or periods that the underlying commodity purchase affects income. Due to the
September 1, 2009 sale of TRN, the Company recognized a pretax loss of $56 million for cash flow hedges of forecasted
purchases that would not occur as a result of the sale (see Note E). The net loss from commodity hedges included in AOCI at
December 31, 2011 was $7 million after tax ($3 million after tax gain at December 31, 2010). During 2011, 2010 and 2009,
there was no material impact on the consolidated financial statements due to commodity hedge ineffectiveness. At
December 31, 2011 and 2010, the Company had the following aggregate notionals of outstanding commodity forward contracts
to hedge forecasted purchases:
Commodity
Crude Oil
Ethane
Naphtha
Natural Gas
Ethane / Propane Mix
Dec 31,
2011
0.2
1.6
90.0
7.4
0.2
Dec 31,
2010
0.1
1.6
—
2.7
—
Notional Volume Unit
million barrels
million barrels
kilotons
million million British thermal units
million barrels
Fair Value Hedges
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current period income and reflected
as “Interest expense and amortization of debt discount” in the consolidated statements of income. The short-cut method is used