E-Z-GO 2010 Annual Report Download - page 75

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63
with foreign currency purchases of materials, foreign currency sales of products, and other assets and liabilities in the normal course of
business. We primarily utilize forward exchange contracts and purchased options with maturities of no more than 18 months that
qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory
purchases and overhead expenses. At January 1, 2011, we had a net deferred gain of $27 million in OCI related to these cash flow
hedges. As the underlying transactions occur, we expect to reclassify a $16 million gain into earnings in the next 12 months and $11
million of gains into earnings in the following 12-month period.
We hedge our net investment position in major currencies and generate foreign currency interest payments that offset other
transactional exposures in these currencies. To accomplish this, we borrow directly in foreign currency and designate a portion of
foreign currency debt as a hedge of net investments. We also may utilize currency forwards as hedges of our related foreign net
investments. We record changes in the fair value of these contracts in other comprehensive income to the extent they are effective as
cash flow hedges. If a contract does not qualify for hedge accounting or is designated as a fair value hedge, changes in the fair value
of the contract are recorded in earnings. Currency effects on the effective portion of these hedges, which are reflected in the
cumulative translation adjustment account within OCI, produced a $26 million after-tax gain in 2010, resulting in an accumulated net
gain balance of $14 million at January 1, 2011. The ineffective portion of these hedges was insignificant.
For our Manufacturing group cash flow hedges, the amount of gain recognized in OCI and the amount reclassified from accumulated
other comprehensive loss into income is provided in the following table:
Amount of Gain (Loss)
Recognized in OCI
(Effective Portion)
Effective Portion of Derivative Reclassified from Accumulated
Other Comprehensive Loss into Income
(In millions)
2010
2009
Gain (Loss) Location
2010
2009
Foreign currency exchange contracts $ 13
$ 65
Cost of sales $ 15 $ 3
In 2009, certain foreign exchange contracts no longer were deemed to be effective cash flow hedges resulting in a gain of $11 million.
These contracts were unwound through the purchase of forward contracts directly offsetting the terms of the undesignated hedges.
Counterparty Credit Risk
Our exposure to loss from nonperformance by the counterparties to our derivative agreements at the end of 2010 is minimal. We do
not anticipate nonperformance by counterparties in the periodic settlements of amounts due. We historically have minimized 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. The credit risk generally is limited to the amount by which the counterparties’ contractual obligations exceed our
obligations to the counterparty. We continuously monitor our exposures to ensure that we limit our risks.
Assets Recorded at Fair Value on a Nonrecurring Basis
The table below presents those assets that are measured at fair value on a nonrecurring basis that had fair value measurement
adjustments during 2010 and 2009. These assets were measured using significant unobservable inputs (Level 3) and include the
following:
Balance at Gain (Loss)
(In millions)
January 1,
2011
January 2,
2010 2010
2009
Finance group
Impaired finance receivables
$ 504
$ 686
$ (148)
$ (165)
Finance receivables held for sale
413
819
(22)
(14)
Other assets
149
156
(47)
(61)
Manufacturing group
Goodwill
—
61
—
(80)
Property, plant and equipment
7
13
(15)
(47)
Impaired Finance Receivables — Impaired nonaccrual finance receivables are included in the table above since the measurement of
required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral. Fair
values of collateral are determined based on the use of appraisals, industry pricing guides, input from market participants, our recent
experience selling similar assets or internally developed discounted cash flow models. Fair value measurements recorded on impaired
finance receivables resulted in charges to provision for loan losses and primarily were related to initial fair value adjustments.
Finance Receivables Held for Sale — Finance receivables held for sale are recorded at the lower of cost or fair value. As a result of
our plan to exit the non-captive Finance business certain finance receivables are classified as held for sale. At January 1, 2011, the
finance receivables held for sale are primarily assets in the timeshare and golf mortgage product lines. Timeshare finance receivables