McKesson 2015 Annual Report Download - page 111

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
19. Hedging Activities
In the normal course of business, we are exposed to interest rate changes and foreign currency fluctuations.
At times, we limit these risks through the use of derivatives such as interest rate swaps and forward foreign
exchange contracts. In accordance with our policy, derivatives are only used for hedging purposes. We do not use
derivatives for trading or speculative purposes.
Foreign currency rate risk
The majority of our operations are conducted in U.S. dollars; however, certain assets and liabilities,
revenues and expense and purchasing activities are incurred in and exposed to other currencies. We have certain
foreign currency rate risk programs that manage the impact of foreign currency fluctuation. These programs are
utilized on a transactional basis when we consider there to be a risk in fair value or volatility in cash flows. These
programs reduce but do not entirely eliminate foreign currency rate risk.
At March 31, 2015 and 2014, forward contracts to hedge the U.S. dollar against cash flows denominated in
Canadian dollars with total notional values of $399 million and $463 million were designated for hedge
accounting. These contracts will mature between March 2016 and March 2020. Changes in the fair values for
contracts designated for hedge accounting are recorded to accumulated other comprehensive income and
reclassified into earnings in the same period in which the hedged transaction affects earnings; losses reclassified
into earnings for contracts designated for hedge accounting were not material in 2015, 2014 and 2013.
We also have a number of forward contracts to primarily hedge the Euro against cash flows denominated in
British pounds and other European currencies. At March 31, 2015 and 2014, the total notional value of these
contracts was $1,755 million and $1,091 million. These contracts will mature from April 2015 to February 2016
and none of these contracts were designated for hedge accounting. Changes in the fair values for contracts not
designated for hedge accounting are recorded directly to earnings and accordingly, net losses from the changes in
the fair value of these contracts of $189 million were recorded within operating expenses in 2015 and were not
material in 2014. However, the losses from these contracts are largely offset by changes in the value of the
underlying intercompany foreign currency loans.
Interest rate risk
From time to time, we have entered into interest rate swaps to hedge the interest rate risk associated with
variable rate debt. Interest rate swaps are used to modify the market risk exposures in connection with the
variable rate debt to achieve primarily fixed rate interest expense. The interest rate swap transactions generally
involve the exchange of floating or fixed interest payments. Our interest rate swaps that were outstanding at
March 31, 2014 all matured during the first half of 2015. These contracts were not designated for hedge
accounting and, accordingly, changes in the fair value of these swaps were recorded directly in earnings. At
March 31, 2014, the total gross notional value of these contracts was $96 million. Amounts recorded to earnings
were not material for 2015 and 2014.
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