E-Z-GO 2011 Annual Report Download - page 78

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Cash Flow Hedges
We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to
movements in foreign currency exchange rates. The primary purpose of our foreign currency hedging activities is to manage the
volatility associated 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 three years that qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on
forecasted sales, inventory purchases and overhead expenses. At December 31, 2011, we had a net deferred gain of $8 million in
Accumulated other comprehensive loss related to these cash flow hedges. Net gains and losses recognized in earnings and
Accumulated other comprehensive loss on these cash flow hedges, including gains and losses related to hedge ineffectiveness,
were not material in 2011 and 2010. We do not expect the amount of gains and losses in Accumulated other comprehensive loss
that will be reclassified to earnings in the next twelve months to be material.
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
foreign currency translation adjustment account within OCI, produced a $4 million after-tax gain in 2011, resulting in an
accumulated net gain balance of $18 million at December 31, 2011. The ineffective portion of these hedges was insignificant.
Counterparty Credit Risk
Our exposure to loss from nonperformance by the counterparties to our derivative agreements at the end of 2011 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 2011 and 2010. These assets were measured using significant unobservable inputs (Level 3) and include the
following:
Balance at
Gain (Loss)
(In millions)
December 31,
2011
January 1,
2011
2011
2010
Finance group
Impaired finance receivables
$ 81
$ 504
$ (82)
$ (148)
Finance receivables held for sale
418
413
(206)
(22)
Other assets
128
149
(49)
(47)
Manufacturing group
Intangible assets
15
—
(41)
—
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 fair value on a nonrecurring basis during
periods in which the fair value is lower than the cost value. As a result of our plan to exit the non-captive finance business certain
finance receivables are classified as held for sale. At December 31, 2011, the finance receivables held for sale include the entire
Golf Mortgage portfolio, the majority of which was transferred to the finance receivables held for sale classification in the fourth
quarter of 2011, and a portion of the Timeshare portfolio. Due to the transfer, these finance receivables were recorded at fair value,
resulting in a $186 million charge recorded to Valuation allowance on transfer of Golf Mortgage portfolio to held for sale.
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Textron Inc. Annual Report • 2011 67