Kimberly-Clark 2010 Annual Report Download - page 37

PART II
(Continued)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational enterprise, we are exposed to risks such as changes in foreign currency exchange rates,
interest rates and commodity prices. A variety of practices are employed to manage these risks, including
operating and financing activities and, where deemed appropriate, the use of derivative instruments. Derivative
instruments are used only for risk management purposes and not for speculation. All foreign currency derivative
instruments are entered into with major financial institutions. Our credit exposure under these arrangements is
limited to agreements with a positive fair value at the reporting date. Credit risk with respect to the counterparties
is actively monitored but is not considered significant since these transactions are executed with a diversified
group of financial institutions.
Presented below is a description of our risks (foreign currency risk and interest rate risk) together with a
sensitivity analysis, performed annually, of each of these risks based on selected changes in market rates and
prices. These analyses reflect management’s view of changes which are reasonably possible to occur over a
one-year period. Also included is a description of our commodity price risk.
Foreign Currency Risk
Foreign currency risk is managed by the systematic use of foreign currency forward and swap contracts for a
portion of our exposure. The use of these instruments allows the management of transactional exposures to
exchange rate fluctuations because the gains or losses incurred on the derivative instruments will offset, in whole
or in part, losses or gains on the underlying foreign currency exposure.
Foreign currency contracts and transactional exposures are sensitive to changes in foreign currency
exchange rates. An annual test is performed to quantify the effects that possible changes in foreign currency
exchange rates would have on annual operating profit based on our foreign currency contracts and transactional
exposures at the current year-end. The balance sheet effect is calculated by multiplying each affiliate’s net
monetary asset or liability position by a 10 percent change in the foreign currency exchange rate versus the U.S.
dollar. The results of these sensitivity tests are presented in the following paragraphs.
As of December 31, 2010, a 10 percent unfavorable change in the exchange rate of the U.S. dollar against
the prevailing market rates of foreign currencies involving balance sheet transactional exposures would have
resulted in a net pretax loss of approximately $39 million. These hypothetical losses on transactional exposures
are based on the difference between the December 31, 2010 rates and the assumed rates. In the view of
management, the above hypothetical losses resulting from these assumed changes in foreign currency exchange
rates are not material to our consolidated financial position, results of operations or cash flows.
Our operations in Venezuela are reported using highly inflationary accounting and their functional currency
is the U.S. dollar. Changes in the value of a Venezuelan bolivar versus the U.S. dollar applied to our bolivar-
denominated net monetary asset position are recorded in income at the time of the change. At December 31,
2010, a 10 percent unfavorable change in the exchange rate would have resulted in a net pretax loss of
approximately $10 million. There are no viable options for hedging this exposure.
The translation of the balance sheets of non-U.S. operations from local currencies into U.S. dollars is also
sensitive to changes in foreign currency exchange rates. Consequently, an annual test is performed to determine
if changes in currency exchange rates would have a significant effect on the translation of the balance sheets of
non-U.S. operations into U.S. dollars. These translation gains or losses are recorded as unrealized translation
adjustments (“UTA”) within stockholders’ equity. The hypothetical change in UTA is calculated by multiplying
the net assets of these non-U.S. operations by a 10 percent change in the currency exchange rates. The results of
this sensitivity test are presented in the following paragraph.
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