Dow Chemical 2014 Annual Report Download - page 115

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during any period. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded
from the assessment of effectiveness are recognized in current period income.
The Company had open interest rate derivatives designated as cash flow hedges at December 31, 2014 with a net loss of
$8 million after tax and a notional U.S. dollar equivalent of $434 million (net loss of $3 million after tax and a notional U.S.
dollar equivalent of $417 million at December 31, 2013).
Current open foreign currency forward contracts hedge the currency risk of forecasted feedstock purchase transactions until
August 2015. The effective portion of the mark-to-market effects of the foreign currency forward contracts is recorded in
AOCL; 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 AOCL at December 31, 2014 was $31 million after tax (net loss of
$11 million after tax at December 31, 2013). During 2014, 2013 and 2012, there was no material impact on the consolidated
financial statements due to foreign currency hedge ineffectiveness. At December 31, 2014, 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
$374 million ($459 million at December 31, 2013).
In the third quarter of 2014, the Company revised its risk management policies for cash flow hedges related to commodity
swaps, futures and option contracts whereby allowing the maturity of trades to extend through December 2020, or 72 months at
December 31, 2014 (at December 31, 2013 maturities of not more than 36 months were allowed). These trades are designated
as cash flow hedges of forecasted commodity purchases. Current open contracts hedge forecasted transactions until December
2020. The effective portion of the mark-to-market effect of the cash flow hedge instrument is recorded in AOCL; it is
reclassified to income in the same period or periods that the underlying commodity purchase affects income. The net loss from
commodity hedges included in AOCL at December 31, 2014 was $96 million after tax ($14 million after tax gain at
December 31, 2013). During 2014, 2013 and 2012, there was no material impact on the consolidated financial statements due
to commodity hedge ineffectiveness. At December 31, 2014 and 2013, the Company had the following gross aggregate
notionals of outstanding commodity forward and futures contracts to hedge forecasted purchases:
Commodity
Dec 31,
2014
Dec 31,
2013 Notional Volume Unit
Corn 1.3 2.7 million bushels
Crude Oil 0.5 0.5 million barrels
Ethane 0.9 1.0 million barrels
Naphtha — 3.0 kilotons
Natural Gas 192.5 82.9 million million British thermal units
Soybeans 1.2 0.8 million bushels
The net after-tax amounts to be reclassified from AOCL to income within the next 12 months are a $64 million loss for
commodity contracts, a $31 million gain for foreign currency contracts and a $4 million loss for interest rate contracts.
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
when the criteria are met. At December 31, 2014 and 2013, the Company had no open interest rate swaps designated as fair
value hedges of underlying fixed rate debt obligations.
Net Foreign Investment Hedges
For derivative instruments that are designated and qualify as net foreign investment hedges, the effective portion of the gain or
loss on the derivative is included in “Cumulative Translation Adjustments” in AOCL. At December 31, 2014 and 2013, the
Company had no open forward contracts or outstanding options to buy, sell or exchange foreign currencies designated as net
foreign investment hedges. At December 31, 2014, the Company had outstanding foreign-currency denominated debt
designated as a hedge of net foreign investment of $167 million ($190 million at December 31, 2013). The results of hedges of
the Company’s net investment in foreign operations included in “Cumulative Translation Adjustments” in AOCL was a net gain
of $15 million after tax for the period ended December 31, 2014 (net gain of $27 million after tax for the period ended
December 31, 2013). During 2014, 2013 and 2012 there was no material impact on the consolidated financial statements due to
hedge ineffectiveness. See Note 23 for further detail on changes in AOCL.