E-Z-GO 2000 Annual Report Download - page 49

In addition, Textron Finance utilizes interest rate agreements to protect against the interest rate
risk associated with their related interest in securitized assets. At year end 2000 and 1999, Textron
Finance had $509 million and $91 million, respectively of such interest rate agreements outstanding.
Textron Finance’s fixed-pay interest rate exchange agreements designated as hedges of variable-
rate debt effectively adjusted the related average interest rate in 2000 to 6.91% from 6.93% and
mature in 2002. Textron Finance’s variable-receive interest rate exchange agreements designated
as hedges of fixed-rate finance receivables were effective in December 2000 and did not materially
impact interest income.
Textron had minimal exposure to loss from nonperformance by the counterparties to its interest
rate exchange agreements at the end of 2000, and does not anticipate nonperformance by counter-
parties in the periodic settlements of amounts due. Textron currently minimizes this potential for risk
by entering into contracts exclusively with major, financially sound counterparties having no less than
a long-term bond rating of “A,” by continuously monitoring the counterparties’ credit ratings and by
limiting exposure with any one financial institution. The credit risk generally is limited to the amount
by which the counterparties’ contractual obligations exceed Textron’s obligations to the counterparty.
Translation of Foreign Currencies, Foreign Exchange Transactions and Foreign Currency
Exchange Contracts
Foreign currency denominated assets and liabilities are translated into U.S. dollars with the adjust-
ments from the currency rate changes being recorded in the currency translation adjustment
account in shareholders’ equity until the related foreign entity is sold or substantially liquidated. Non-
U.S. dollar financing transactions, including currency swaps, are used to effectively hedge long-term
investments in foreign operations with the same corresponding currency. Foreign currency gains
and losses on the hedge of the long-term investments are recorded in the currency translation
adjustment with the offset recorded as an adjustment to the non-U.S. dollar financing liability.
Forward exchange contracts are used to hedge certain foreign currency transactions and certain
firm sales and purchase commitments denominated in foreign currencies. Gains and losses from
currency rate changes on hedges of foreign currency transactions are recorded currently in income.
Gains and losses relating to the hedge of firm sales and purchase commitments are included in the
measurement of the underlying transactions when they occur. Foreign exchange gains and losses
included in income have not been material.
The table below summarizes, by major currency, Textron’s forward exchange contracts and cur-
rency swaps in U.S. dollars. The buy amounts represent the U.S. dollar equivalent of commitments
to purchase foreign currencies and the sell amounts represent the U.S. dollar equivalent of commit-
ments to sell foreign currencies. The foreign currency amounts have been translated into a U.S.
dollar equivalent using the exchange rate at the balance sheet date.
Buy Contracts Sell Contracts
Contract Unrealized Contract Unrealized
(In millions) Amount Gain/(Loss) Amount Gain/(Loss)
December 30, 2000
British Pound $208 $(1) $105 $ –
Canadian Dollar 281 –15 –
Euro 116 –51 –
Other 26 –38 1
To t al $631 $(1) $209 $ 1
January 1, 2000
British Pound $ 74 $1 $485 $ 7
Canadian Dollar 263 5 15 –
Euro 7 – 447 18
Other 11 – 35 –
Total $355 $6 $982 $25
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133 “Accounting for Derivative Instruments and Hedging
Activities.” SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities and
measure those instruments at fair value. In June 1999, the FASB issued SFAS 137, which deferred
the effective date of SFAS 133 to all fiscal quarters of years beginning after June 15, 2000. In June
2000, the FASB issued SFAS 138 which amended accounting and reporting standards and addressed
issues causing implementation difficulties with SFAS 133 for certain derivative instruments and
hedging activities. These statements became effective for the Company on December 31, 2000. The
Company will record the effect of the transition to these new accounting requirements in the first
47 TEXTRON 2000 ANNUAL REPORT