Harman Kardon 2010 Annual Report Download - page 78

Harman International Industries, Incorporated and Subsidiaries
(Dollars in thousands, except per-share data and unless otherwise indicated)
Euro. The fair market value of all our derivative contracts change with fluctuations in interest rates and currency
rates, and are designed so that changes in their values are offset by changes in the values of the underlying
exposures. Derivative financial instruments are held solely has risk management tools and not for trading or
speculative purposes. We do not utilize derivates that contain leverage features. On the date that we enter into a
derivative that qualifies for hedge accounting, the derivative is designated as a hedge of the identified exposure.
We document all relationships between hedging instruments and hedged items for which we apply hedge
accounting treatment and assess the effectiveness of our hedges at inception and on an ongoing basis.
We record all derivative instruments as either assets or liabilities at fair value in our Consolidated Balance
Sheets. Certain of these derivative contracts have been designated as cash flow hedges, whereby gains and losses
are reported within AOCI in our Consolidated Balance Sheets, until the underlying transaction occurs, at which
point they are reported in earnings as gains and losses in our Consolidated Statements of Operations. Certain of
our derivatives, for which hedge accounting is not applied, are effective as economic hedges. These derivative
contracts are required to be recognized each period at fair value, with gains and losses reported in earnings in our
Consolidated Statements of Operations and therefore do result in some level of earnings volatility. The level of
volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the
currency and interest rate markets during the period. The related cash flow impacts of all our derivative activities
are reflected as cash flows from operating activities in our Consolidated Statements of Cash Flows. Refer to Note
10–Derivatives for more information.
Interest Rate Management: We have an interest rate swap agreement to effectively convert the interest on an
operating lease from a variable to a fixed rate. At the end of each reporting period, the discounted fair value of the
interest rate swap agreement is calculated. The fair value is recorded as an asset or liability. The effective gain or
loss is recorded as a debit or credit to AOCI in our Consolidated Balance Sheets and any ineffectiveness is recorded
immediately to rent expense in our Consolidated Statements of Operations. Upon maturity, any gain or loss within
AOCI is reclassified into earnings in the then-current period. Refer to Note 10 – Derivatives for more information.
Foreign Currency Management: The fair value of foreign currency related derivatives is included in our
Consolidated Balance Sheets in other current assets and accrued liabilities. The earnings impact of cash flow
hedges relating to forecasted purchases of inventory is reported in cost of sales to match the underlying
transaction being hedged. Unrealized gains and losses on these instruments are deferred in AOCI in our
Consolidated Balance Sheets until the underlying transaction is recognized in earnings. The earnings impact of
cash flow hedges relating to the variability in cash flows associated with foreign currency denominated assets
and liabilities is reported in cost of sales, SG&A or other expense in our Consolidated Statements of Operations,
depending on the nature of the assets or liabilities being hedged. The amounts deferred in AOCI in our
Consolidated Balance Sheets associated with these instruments relate to spot-to-spot differentials from the date of
designation until the hedged transaction takes place.
Severance and Exit Costs: We recognize liabilities for severance and exit costs based upon the nature of
the liability incurred. For involuntary separation programs that are conducted according to the guidelines of our
written involuntary separation plan and for involuntary separation programs that are conducted according to the
provisions of collective bargaining agreements or statutes, we recognize the liability when it is probable and
reasonably estimable. For one-time termination benefits, such as additional severance pay, and other exit costs,
such as lease and other contract termination costs, the liability is measured and originally recognized at fair value
in the period in which the liability is incurred, with subsequent changes recognized in the period of change. Refer
to Note 15 – Restructuring for more information.
Share-Based Compensation: Share-based compensation expense is recognized based on the estimated fair
value of stock options and similar equity instruments awarded to employees. Refer to Note 14 – Shareholders’
Equity and Share-Based Compensation for more information.
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