Graco 2012 Annual Report Download - page 66

60
value hedges, the changes in fair value are reported in earnings, generally offsetting the change in value of the underlying instrument
being hedged.
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 within Prepaid expenses and other and Other accrued liabilities
in the Consolidated Balance Sheets based on the maturity of the Company’s forward contracts at December 31, 2012 and 2011.
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
remeasurement adjustment included in net income (loss) as other expense, net.
The Company designates certain foreign currency denominated, long-term intercompany financing transactions as being of a long-
term investment nature and records gains and losses on the transactions arising from changes in exchange rates as translation
adjustments.
The Company considers Venezuela a highly inflationary economy. Accounting standards require the functional currency of foreign
operations operating in highly inflationary economies to be the same as the reporting currency of the Company. Accordingly, the
functional currency of the Company’s Venezuelan operations is the U.S. Dollar. The Company’s Venezuelan operations had $63.4
million of net monetary assets denominated in Bolivar Fuertes as of December 31, 2012, which are subject to changes in value
based on changes in the exchange rate for Bolivar Fuertes. In future periods, foreign exchange gains (losses) arising due to the
appreciation (depreciation) of Bolivar Fuertes versus the U.S. Dollar will result in one-time benefits (charges) in each reporting
period during which such exchange rate changes become effective. Throughout 2012 and 2011, the Company used the exchange
rate of the Transaction System for Foreign Currency Denominated Securities (SITME) of 5.3 Bolivar Fuertes to U.S. Dollar.
During 2012, 2011 and 2010, the Company’s Venezuelan operations generated less than 1% of consolidated net sales.
In February 2013, the exchange rate for Bolivar Fuertes declined to 6.3 Bolivar Fuertes to U.S. Dollar, and as a result, the Company
expects to record a charge to other expense to reduce the value of the net monetary assets of its Venezuelan operations that are
denominated in Bolivar Fuertes.
Income Taxes
The Company accounts for deferred income taxes using the asset and liability approach. Under this approach, deferred income
taxes are recognized based on the tax effects of temporary differences between the financial statement and tax bases of assets and
liabilities, as measured by current enacted tax rates. Valuation allowances are recorded to reduce the deferred tax assets to an
amount that will more likely than not be realized. No provision is made for the U.S. income taxes on the undistributed earnings
of non-U.S. subsidiaries that are considered to be permanently invested.
The Company’s income tax provisions are based on calculations and assumptions that are subject to examination by the Internal
Revenue Service and other tax authorities. Although the Company believes that the positions taken on previously filed tax returns
are reasonable, it has established tax and interest reserves in recognition that various taxing authorities may challenge the positions
taken, which could result in additional liabilities for taxes and interest. The Company regularly reviews its deferred tax assets for
recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing
temporary differences and tax planning strategies.
The authoritative guidance requires application of a “more likely than not” threshold to the recognition and derecognition of tax
positions. The Company’s ongoing assessments of the more likely than not outcomes of tax authority examinations and related
tax positions require significant judgment and can increase or decrease the Company’s effective tax rate, as well as impact operating
results.