Kimberly-Clark 2010 Annual Report Download - page 71

KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Set forth below is a summary of the fair values of our derivative instruments classified by the risks they are
used to manage as of December 31, 2010.
Assets Liabilities
2010 2009 2010 2009
(Millions of dollars)
Foreign currency exchange risk ............................................. $46 $16 $39 $84
Interest rate risk ......................................................... 24 41 2—
Commodity price risk .................................................... —173
Total .................................................................. $70 $58 $48 $87
Foreign Currency Exchange Risk Management
We have a centralized U.S. dollar functional currency international treasury operation (“In-House Bank”)
that manages foreign currency exchange risks by netting, on a daily basis, exposures to recorded non-U.S. dollar
assets and liabilities and entering into derivative instruments with third parties whenever the net exposure in any
single currency exceeds predetermined limits. These derivative instruments are not designated as hedging
instruments. Changes in the fair value of these instruments are recorded in earnings when they occur. The
In-House Bank also records the gain or loss on the remeasurement of its non-U.S. dollar-denominated monetary
assets and liabilities in earnings. Consequently, the effect on earnings from the use of these non-designated
derivatives is substantially neutralized by the recorded transactional gains and losses. The In-House Bank’s daily
notional derivative positions with third parties averaged $1.1 billion during 2010 and its average net exposure for
the year was $900 million. The In-House Bank used eight counterparties for its foreign exchange derivative
contracts.
We enter into derivative instruments to hedge a portion of the net foreign currency exposures of our
non-U.S. operations, principally for their forecasted purchases of pulp, which are priced in U.S. dollars. The
derivative instruments used to manage these exposures are designated and qualify as cash flow hedges. We also
hedge a portion of the net foreign currency exposures of our non-U.S. operations for imported intercompany
finished goods and work-in-process priced predominately in U.S. dollars and euros through the use of derivative
instruments that are designated and qualify as cash flow hedges.
Gains and losses on these cash flow hedges, to the extent effective, are recorded in other comprehensive
income net of related income taxes and released to earnings as the related finished goods inventory containing
the pulp and imported intercompany purchases are sold to unaffiliated customers. As of December 31, 2010,
outstanding derivative contracts of $700 million notional value were designated as cash flow hedges for the
forecasted purchases of pulp and intercompany finished goods and work-in-process.
The foreign currency exposure on intercompany balances managed outside the In-House Bank, primarily
loans, is hedged with derivative instruments with third parties. At December 31, 2010, the notional amount of
these predominantly undesignated derivative instruments was $580 million.
Foreign Currency Translation Risk Management
Translation adjustments result from translating foreign entities’ financial statements to U.S. dollars from
their functional currencies. Translation exposure, which results from changes in translation rates between
functional currencies and the U.S. dollar, generally is not hedged. There were no net investment hedges in place
at December 31, 2010. The risk to any particular entity’s net assets is minimized to the extent that the entity is
financed with local currency borrowing.
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