Graco 2010 Annual Report Download - page 54

Newell Rubbermaid Inc. 2010 Annual Report
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50 NEWELL RUBBERMAID 2010 Annual Report
Derivative Financial Instruments
Derivative financial instruments are generally used to manage certain commodity, interest rate and foreign currency risks. These
instruments primarily include interest rate swaps, cross-currency interest rate swaps, forward exchange contracts and options. The
Company’s forward exchange contracts, options and cross-currency interest rate swaps do not subject the Company to exchange rate
risk because gains and losses on these instruments generally offset gains and losses on the assets, liabilities, and other transactions
being hedged. However, these instruments, when settled, impact the Company’s cash flows from operations to the extent the
underlying transaction being hedged is not simultaneously settled due to an extension, a renewal or otherwise.
On the date when the Company enters into a derivative, the derivative is designated as a hedge of the identified exposure.
The Company measures effectiveness of its hedging relationships both at hedge inception and on an ongoing basis. No material
ineffectiveness was recorded on designated hedges in 2010, 2009 and 2008.
Interest Rate Risk Management
Gains and losses on interest rate swaps designated as cash flow hedges, to the extent that the hedge relationship has been effective,
are deferred in other comprehensive income (loss) and recognized in interest expense over the period in which the Company recognizes
interest expense on the related debt instrument. Any ineffectiveness on these instruments is immediately recognized in interest
expense in the period that the ineffectiveness occurs.
Interest rate swaps designated as fair value hedges include interest rate swaps on long-term debt, cross-currency interest
rate swaps and forward exchange contracts. The Company records the fair value of interest rate swaps on long-term debt as an
asset or liability with a corresponding adjustment to the carrying value of the debt. Any ineffectiveness on these instruments is
immediately recognized in interest expense in the period that the ineffectiveness occurs. See foreign currency management
below for discussion of cross-currency interest rate swaps and forward exchange contracts.
Gains or losses resulting from the early termination of interest rate swaps are deferred as an increase or decrease to the
carrying value of the related debt and amortized as an adjustment to the yield of the related debt instrument over the remaining
period originally covered by the swap. The cash received or paid relating to the termination of interest rate swaps is included in
other as an operating activity in the Consolidated Statements of Cash Flows.
Foreign Currency Management
The Company utilizes forward exchange contracts and options to manage foreign exchange risk related to both known and anticipated
intercompany transactions and third-party commercial transaction exposures of approximately one year in duration or less. For
instruments designated as cash flow hedges, the effective portion of the changes in fair value of these instruments is reported in
other comprehensive income (loss) and reclassified into earnings in the same period or periods in which the hedged transactions affect
earnings. Any ineffective portion is immediately recognized in earnings. For instruments designated as fair value hedges, the changes
in fair value are reported in earnings, generally offsetting the change in value of the underlying instrument being hedged.
The Company has historically utilized cross-currency interest rate swaps to hedge long-term intercompany financing transactions.
Gains and losses related to qualifying forward exchange contracts, which hedge certain anticipated transactions, are recognized
in other comprehensive income (loss) until the underlying transaction occurs.
The fair values of foreign currency hedging instruments are recorded in the captions Prepaid expenses and other, Other assets,
Other accrued liabilities or Other noncurrent liabilities in the Consolidated Balance Sheets depending on the maturity of the
Company’s cross-currency interest rate swaps and forward contracts at December 31, 2010 and 2009. The earnings impact of
cash flow hedges relating to forecasted purchases of inventory is generally reported in cost of products sold to match the
underlying transaction being hedged. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted
transaction is no longer probable of occurring, in which case previously deferred hedging gains or losses would be recorded to
earnings immediately.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the rates of exchange in effect at year-end. The related
translation adjustments are made directly to accumulated other comprehensive income (loss). Income and expenses are translated at
the average monthly rates of exchange in effect during the year. Gains and losses from foreign currency transactions of these subsidiaries
are included in net income (loss). International subsidiaries operating in highly inflationary economies remeasure nonmonetary assets
at historical rates, while net monetary assets are remeasured at current rates, with the resulting remeasurememt adjustment included
in net income (loss) as other expense, net.
The Company designates certain foreign currency denominated, long-term intercompany financing transactions as economic
hedges of net investments in foreign operations and records the gain or loss on the transaction arising from changes in exchange
rates as a translation adjustment to the extent the intercompany financing arrangement is effective as a hedge.
In December 2009, the Company ceased the use of the official exchange rate to translate assets, liabilities and income (loss)
for its operations in Venezuela and instead began using the parallel exchange rate. Effective January 1, 2010, the Company accounted
for Venezuela as a highly inflationary economy as the three-year cumulative inflation rate for Venezuela, using a blend of the
Consumer Price Index associated with the city of Caracas and the National Consumer Price Index (developed commencing in 2008
and covering the entire country of Venezuela), exceeded 100%. Accounting standards require the functional currency of the
foreign operations operating in highly inflationary economies to be the same as the reporting currency of the Company. Accordingly,
the Company’s Venezuelan subsidiary began using the U.S. Dollar as its functional currency on January 1, 2010. As a result of