Invacare 2012 Annual Report Download - page 120

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INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
forecasted sales denominated in foreign currencies and the price risk associated with forecasted purchases of
inventory over the next twelve months. Interest rate swaps are, at times, utilized to manage interest rate risk
associated with the company’s fixed and floating-rate borrowings.
The company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet
measured at fair value. A majority of the company’s derivative instruments are designated and qualify as cash
flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess
of the cumulative change in the fair value of the hedged item, if any, is recognized in current earnings during the
period of change.
During 2012, the company was a party to interest rate swap agreements that qualified as cash flow hedges
and effectively converted floating-rate debt to fixed-rate debt, so the company could avoid the risk of changes in
market interest rates. The gains or losses on interest rate swaps are reflected in interest expense on the
consolidated statement of comprehensive income (loss).
To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory
purchases/sales over the next year, the company utilizes foreign currency forward contracts to hedge portions of
its forecasted purchases/sales denominated in foreign currencies. The gains and losses are included in cost of
products sold and selling, general and administrative expenses on the consolidated statement of comprehensive
income (loss). If it is later determined that a hedged forecasted transaction is unlikely to occur, any prospective
gains or losses on the forward contracts would be recognized in earnings. The company does not expect any
material amount of hedge ineffectiveness related to forward contract cash flow hedges during the next twelve
months.
The company has historically not recognized any material amount of ineffectiveness related to forward
contract cash flow hedges because the company generally limits it hedges to between 60% and 90% of total
forecasted transactions for a given entity’s exposure to currency rate changes and the transactions hedged are
recurring in nature. Furthermore, the majority of the hedged transactions are related to intercompany sales and
purchases for which settlement occurs on a specific day each month. Forward contracts with a total notional
amount in USD of $176,784,000 and $189,793,000 matured during the twelve months ended December 31, 2012
and 2011, respectively.
FS-40