Kimberly-Clark 2008 Annual Report Download - page 69

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KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
assumed by the Financing Entities at the time they acquired the Notes. These monetization loans are secured by
the Notes. The Corporation also contributed to the Financing Entities intercompany notes receivable aggregating
$662 million and intercompany preferred stock of $50 million, which serve as secondary collateral for the
monetization loans. The Corporation has provided no noncontractual financial or other support to the financing
entities during their existence. Events of default would result in accelerating the repayment by the financing
entities of the monetization loans. Events of default include (i) payment default by the financing entities on the
monetization loans, (ii) payment default on the Notes by the issuer, (iii) events of default under the intercompany
notes receivable and preferred stock contributed by Corporation as secondary collateral, including the
Corporation’s credit rating of A being downgraded below BBB- or Baa3, and (iv) failure to maintain in place
irrevocable standby letters of credit issued by banks which are rated AA- or above by Standard & Poor’s or Aa3
or above by Moody’s.
In 2003 upon adoption of FIN 46(R), Consolidation of Variable Interest Entities, (“FIN 46(R)”), the
Corporation determined that the Third Party was the primary beneficiary of the Financing Entities as a result of
the interest rate variability allocated to it in accordance with FIN 46(R).
On June 30, 2008, the maturity dates of the lending arrangements with the Third Party were extended. FSP
46(R)-6, Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R), (“FSP
46(R)”), which was issued in 2006, requires that certain interest rate variability no longer be considered in
determining the primary beneficiary of variable interest entities. The exclusion of interest rate variability resulted
in the Corporation absorbing the majority of the variability created in the financing entities arising from the
credit default risk on the monetization loans and the standby letters of credit. As required by FIN 46(R) in
connection with the extensions, the Corporation reconsidered the primary beneficiary determination and
concluded, after excluding the interest rate variability as required by FSP 46(R), that it was now the primary
beneficiary. Because the Corporation became the primary beneficiary of the Financing Entities on June 30, 2008,
it began consolidating them. In accordance with FIN 46(R), the assets and liabilities of the Financing Entities
were recorded at fair value as of June 30, 2008. Because the fair value of the monetization loans exceeded the
fair value of the Notes, the Corporation recorded an extraordinary charge of $12 million ($8 million after tax) on
its Consolidated Income Statement for the period ended June 30, 2008, as required by FIN 46(R). In accordance
with FIN 46(R), prior period financial statements have not been adjusted to reflect the consolidation of the
Financing Entities.
Notes totaling $603 million are included in long-term notes receivable and the monetization loans totaling
$614 million are included in debt payable within one year on the Corporation’s Consolidated Balance Sheet.
Interest income on the Notes of $14 million and interest expense of $15 million on the monetization loans have
been reported on the Corporation’s 2008 Consolidated Income Statement. The Notes and monetization loans are
being adjusted from their June 30, 2008 fair values to their face values through their respective maturity dates
with the adjustment included in the above interest income and interest expense, respectively.
The Notes held by the Financing Entities have an aggregate fair value of $560 million and the monetization
loans have an aggregate fair value of $610 million at December 31, 2008. These financial assets and liabilities
are not traded in active markets. Accordingly, their fair values were calculated using a floating rate pricing model
that compared the stated spread to the fair value spread to determine the price at which each of the financial
instruments should trade. The model used the following inputs to calculate fair values: current LIBOR rate, fair
value credit spread, stated spread, maturity date and interest payment dates. Because the Notes are backed by the
irrevocable letters of credit the Corporation does not consider any unrealized losses on the Notes to be other than
temporary at December 31, 2008.
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