Harman Kardon 2008 Annual Report Download - page 94

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76
We elected to exclude forward points from the effectiveness assessment. At the end of the period, we
calculate the fair value relating to the change in forward points which is recorded to current earnings as
other non-operating income. For the year ended June 30, 2008, we recognized $0.6 million in net gains
related to the change in forward points.
At June 30, 2008, we had forward contracts maturing through June 2009 to sell Euros and buy U.S.
Dollars of approximately $75.0 million to hedge foreign currency purchases. At June 30, 2008, the
amount associated with these hedges that is expected to be reclassified from accumulated other
comprehensive income (loss) to earnings within the next twelve months is a loss of approximately $2.4
million. The fair market value of foreign currency forward contracts at June 30, 2008 was $2.5 million.
In the year ended June 30, 2008 we recognized a loss of $6.3 million from cash flow hedges of forecasted
foreign currency transactions compared to $4.0 million in net losses in the same period last year.
When forward contracts do not meet the requirements of hedge accounting, we recognize the gain or loss
on the associated contracts directly in current period earnings in cost of goods sold as unrealized
exchange gains/(losses). At June 30, 2008, we had forward contracts maturing through March 2009 to
sell Japanese Yen and buy US dollars of approximately $6.8 million to hedge foreign currency
denominated purchases that were not eligible for hedge accounting. For the year ended June 30, 2008, we
recognized a loss on these hedge contracts of $0.1 million.
As of June 30, 2008, we had forward contracts maturing through October 2008 to purchase and sell the
equivalent of $41.1 million of various currencies to hedge foreign currency denominated inter-company
loans. At June 30, 2008, the fair value on these contracts was a net gain of $0.2 million. Adjustments to
the carrying value of the foreign currency forward contracts offset the gains and losses on the underlying
loans.
In February 2007, we entered into an interest rate swap contract to effectively convert interest on an
operating lease from a variable rate to a fixed rate. The objective of the swap contract is to offset changes
in rent expenses caused by interest rate fluctuations. The interest rate swap contract is designated as a
cash flow hedge. At the end of each reporting period, the discounted fair value of the effective portion of
the swap contract is calculated and recorded to other comprehensive income. The accrued but unpaid net
interest on the swap contract is recorded in rent expense, which is included in selling, general and
administrative expenses in our consolidated statement of operations. If the hedge is determined to be
ineffective, the ineffective portion will be reclassified from other comprehensive income and recorded as
rent expense. For the twelve months ended June 30, 2008, we recognized no ineffectiveness. As of June
30, 2008, the notional amount of the swap was $30.6 million and the amount recorded in other
comprehensive income was a gain of $1.1 million. At June 30, 2008, the fair value of the interest rate
swap contract was $1.1 million. The amount associated with the swap contract that is expected to be
recorded as rent expense over the next twelve months is a gain of $0.2 million.