Foot Locker 2006 Annual Report Download - page 66

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50
The Company has designated these hedging instruments as hedges of the net investments in foreign subsidiaries,
and will use the spot rate method of accounting to value changes of the hedging instrument attributable to currency
rate fluctuations. As such, adjustments in the fair market value of the hedging instrument due to changes in the spot
rate will be recorded in other comprehensive income and are expected to offset changes in the euro-denominated net
investment. Amounts recorded to foreign currency translation within accumulated other comprehensive loss will remain
there until the net investment is disposed of. The amount recorded within the foreign currency translation adjustment
included in accumulated other comprehensive loss on the Consolidated Balance Sheet at February 3, 2007 decreased
shareholders’ equity by $5 million, net of tax. At January 28, 2006, the amount recorded to foreign currency translation
was not significant. The effect on the Consolidated Statements of Operations related to the net investments hedges
was income of $3 million for 2006 and was not significant for 2005.
Foreign Exchange Risk Management — Derivative Holdings Designated as Non-Hedges
The Company mitigates the effect of fluctuating foreign exchange rates on the reporting of foreign currency
denominated earnings by entering into a variety of derivative instruments including option currency contracts. These
contracts are not designated as hedges and as a result, the changes in the fair value of these financial instruments are
charged to the statement of operations immediately. The changes in fair values recorded in the Consolidated Statement
of Operations for the year ended February 3, 2007 was not significant and was a net gain of approximately $3 million for
contracts that settled in the second quarter of 2005.
The Company also enters into certain forward foreign exchange contracts to hedge intercompany foreign-currency
denominated transactions. In 2005, the Company recorded gains of approximately $3 million in selling, general and
administrative expenses to reflect the fair value of these contracts. These gains were offset by the foreign exchange
losses on the revaluation of the underlying assets or liabilities. The amount recorded during 2006 was not significant.
Foreign Currency Exchange Rates
The table below presents the fair value, notional amounts, and weighted-average exchange rates of foreign
exchange forward and option contracts outstanding at February 3, 2007.
Fair Value
(US in millions)
Contract Value
(US in millions)
Weighted-Average
Exchange Rate
Inventory
%W[a6GNN%TKVKUJ ............................. $ (1) $63 .6799
%W[866GNNa ................................ — 4 1.3108
Buy $US/Sell CAD$ ............................. — 2 .9088
Earnings
6GNNa%W[86 ................................ $— $29 1.2962
Sell CAD$/ Buy $US ............................. — 7 .8739
Intercompany
%W[a6GNN%TKVKUJ ............................ $— $25 .6762
%W[%TKVKUJ6GNNa ............................. — 25 .6668
%W[6(.6GNNa ................................ — 1 .7456
%W[a6GNN86 ................................ — 1 1.3078
Buy US/Sell NZD ............................... — 2 .5985
Buy US/Sell AUD ............................... — 2 .7456
Buy US/Sell CAD ............................... — 1 .8727