Johnson Controls 2012 Annual Report Download - page 78

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Valuation Methods
Foreign currency exchange derivatives – The Company selectively hedges anticipated transactions that are subject to
foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency
exchange derivatives are valued under a market approach using publicized spot and forward prices. As cash flow
hedges under ASC 815, the effective portion of the hedge gains or losses due to changes in fair value are initially
recorded as a component of accumulated other comprehensive income and are subsequently reclassified into
earnings when the hedged transactions occur and affect earnings. Any ineffective portion of the hedge is reflected in
the consolidated statement of income. These contracts were highly effective in hedging the variability in future cash
flows attributable to changes in currency exchange rates at September 30, 2012 and 2011. The fair value of foreign
currency exchange derivatives that are designated as fair value hedges under ASC 815, as well as those not
designated as hedging instruments under ASC 815, are recorded in the consolidated statement of income.
Commodity derivatives – The Company selectively hedges anticipated transactions that are subject to commodity
price risk, primarily using commodity hedge contracts, to minimize overall price risk associated with the Company’s
purchases of lead, copper, tin and aluminum. The commodity derivatives are valued under a market approach using
publicized prices, where available, or dealer quotes. As cash flow hedges, the effective portion of the hedge gains or
losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive
income and are subsequently reclassified into earnings when the hedged transactions, typically sales or cost related
to sales, occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statement of
income. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in
commodity price changes at September 30, 2012 and 2011.
Interest rate swaps and related debt – The Company selectively uses interest rate swaps to reduce market risk
associated with changes in interest rates for its fixed-rate bonds. As fair value hedges, the interest rate swaps and
related debt balances are valued under a market approach using publicized swap curves. Changes in the fair value of
the swap and hedged portion of the debt are recorded in the consolidated statement of income. In the second quarter
of fiscal 2011, the Company entered into a fixed to floating interest rate swap totaling $100 million to hedge the
coupons of its 5.80% notes maturing November 15, 2012, two fixed to floating interest rate swaps totaling $300
million to hedge the coupon of its 4.875% notes maturing September 15, 2013 and five fixed to floating interest rate
swaps totaling $450 million to hedge the coupon of its 1.75% bond maturing March 1, 2014. These eight interest
rate swaps were outstanding as of September 30, 2012 and 2011.
Cross-currency interest rate swaps – The Company selectively uses cross-currency interest rate swaps to hedge the
foreign currency rate risk associated with certain of its investments in Japan. The cross-currency interest rate swaps
are valued using observable market data. Changes in the market value of the swaps are reflected in the foreign
currency translation adjustments component of accumulated other comprehensive income where they offset gains
and losses recorded on the Company’s net investment in Japan. At September 30, 2012 and 2011, the Company had
three cross-currency interest rate swaps outstanding totaling 20 billion yen.
Investments in marketable common stock – The Company invests in certain marketable common stock, which is
valued under a market approach using publicized share prices. As of September 30, 2012 and 2011, the Company
recorded unrealized gains of $5 million and $9 million, respectively, in accumulated other comprehensive income.
The Company also recorded unrealized losses of $3 million in accumulated other comprehensive income on these
investments as of September 30, 2011, and no unrealized losses as of September 30, 2012. In the second quarter of
fiscal 2012, the Company recorded an impairment charge related to an investment in marketable common stock due
to the investee’s bankruptcy announcement in March 2012. As a result, the Company recorded a $14 million
impairment charge within selling, general, and administrative expenses in the Power Solutions segment. The
impairment reduced the investment to zero and was measured under a market approach using the publicized share
price. The inputs utilized in the analysis are classified as Level 1 inputs within the fair value hierarchy as defined in
ASC 820.
Equity swaps – The Company selectively uses equity swaps to reduce market risk associated with certain of its
stock-based compensation plans, such as its deferred compensation plans. The equity swaps are valued under a
market approach as the fair value of the swaps is equal to the Company’s stock price at the reporting period date.
Changes in fair value on the equity swaps are reflected in the consolidated statement of income within selling,
general and administrative expenses.
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate
their carrying values. The fair value of long-term debt, which was $6.3 billion and $4.9 billion at September 30,