John Deere 2010 Annual Report Download - page 49

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The notional amount of the cross-currency interest rate contracts
was $849 million at October 31, 2010. The effective portions
of the fair value gains or losses on these cash fl ow hedges were
recorded in other comprehensive income (OCI) and subse-
quently reclassifi ed into interest expense or other operating
expenses (foreign exchange) in the same periods during which
the hedged transactions affected earnings. These amounts offset
the effects of interest rate or foreign currency exchange rate
changes on the related borrowings. Any ineffective portions
of the gains or losses on all cash fl ow interest rate contracts
designated as cash fl ow hedges were recognized currently in
interest expense or other operating expenses (foreign exchange)
and were not material during any years presented. The cash
fl ows from these contracts were recorded in operating activities
in the statement of consolidated cash fl ows.
The amount of loss recorded in OCI at October 31, 2010
that is expected to be reclassifi ed to interest expense or other
operating expenses in the next twelve months if interest rates or
exchange rates remain unchanged is approximately $11 million
after-tax. These contracts mature in up to 39 months. There were
no gains or losses reclassifi ed from OCI to earnings based on
the probability that the original forecasted transaction would
not occur.
Fair Value Hedges
Certain interest rate contracts (swaps) were designated as fair
value hedges of borrowings. The total notional amounts of the
receive-fi xed/pay-variable interest rate contracts at October 31,
2010 and 2009 were $6,640 million and $6,912 million,
respectively. The effective portions of the fair value gains or
losses on these contracts were offset by fair value gains or losses
on the hedged items (fi xed-rate borrowings). Any ineffective
portions of the gains or losses were recognized currently in
interest expense and were not material during any years
presented. The cash fl ows from these contracts were recorded in
operating activities in the statement of consolidated cash fl ows.
The gains (losses) on these contracts and the underlying
borrowings recorded in interest expense were as follows in
millions of dollars:
2010 2009
Interest rate contracts* ........................................... $ 150 $ 250
Borrowings* * .......................................................... (149 ) ( 251)
* Includes changes in fair values of interest rate contracts excluding net accrued
interest income of $222 million and $203 million during 2010 and 2009, respectively.
** Includes adjustments for fair values of hedged borrowings excluding accrued interest
expense of $336 million and $366 million during 2010 and 2009, respectively.
Derivatives Not Designated as Hedging Instruments
The company has certain interest rate contracts (swaps and caps),
foreign exchange contracts (forwards and swaps) and cross-
currency interest rate contracts (swaps), which were not formally
designated as hedges. These derivatives were held as economic
hedges for underlying interest rate or foreign currency exposures
primarily for certain borrowings and purchases or sales of
inventory. The total notional amounts of the interest rate swaps
at October 31, 2010 and 2009 were $2,702 million and $1,745
million, the foreign exchange contracts were $2,777 million and
$2,156 million and the cross-currency interest rate contracts were
$60 million and $839 million, respectively. At October 31, 2010
and 2009, there were also $1,055 million and $1,560 million,
respectively, of interest rate caps purchased and the same
amounts sold at the same capped interest rate to facilitate
borrowings through securitization of retail notes. The fair value
gains or losses from the interest rate contracts were recognized
currently in interest expense and the gains or losses from foreign
exchange contracts in cost of sales or other operating expenses,
generally offsetting over time the expenses on the exposures
being hedged. The cash fl ows from these non-designated
contracts were recorded in operating activities in the statement
of consolidated cash fl ows.
Fair values of derivative instruments in the consolidated
balance sheet at October 31 in millions of dollars follow:
2010 2009
Other Assets
Designated as hedging instruments:
Interest rate contracts ............................................. $ 457 $ 507
Not designated as hedging instruments:
Interest rate contracts ............................................. 36 43
Foreign exchange contracts .................................... 24 17
Cross-currency interest rate contracts ..................... 3 173
Total not designated ........................................... 63 233
Total d erivat ives ...................................................... $ 520 $ 74 0
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts ............................................. $ 18 $ 77
Cross-currency interest rate contracts ..................... 47
Total designated ................................................. 65 77
Not designated as hedging instruments:
Interest rate contracts ............................................. 20 44
Foreign exchange contracts .................................... 23 32
Cross-currency interest rate contracts ..................... 1 1
Total not designated ........................................... 44 77
Total derivatives ...................................................... $ 109 $ 154
The classifi cation and gains (losses) including accrued
interest expense related to derivative instruments on the
statement of consolidated income consisted of the following in
millions of dollars:
2010 2009
Fair Value Hedges
Interest rate contracts – Interest expense ................ $ 372 $ 453
Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts – OCI (pretax)* ..................... (14) (90)
Foreign exchange contracts – OCI (pretax)* ............. (42)
Reclassifi ed from OCI
(Effective Portion):
Interest rate contracts – Interest expense* ............... (68) (84)
Foreign exchange contracts – Other expense* ......... (11)
Recognized Directly in Income
(Ineffective Portion):
Interest rate contracts – Interest expense* ............... ** **
Foreign exchange contracts – Other expense* ......... ** **
(continued)