McKesson 2016 Annual Report Download - page 117

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
20. Hedging Activities
In the normal course of business, we are exposed to interest rate and foreign exchange rate fluctuations. At
times, we limit these risks through the use of derivatives such as interest rate swaps, cross currency swaps and
foreign currency forward contracts. In accordance with our policy, derivatives are only used for hedging
purposes. We do not use derivatives for trading or speculative purposes.
Interest rate risk
From time to time, we may enter into interest rate swaps which involve the exchange of floating and fixed-rate
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. Amounts recorded to earnings were not material for 2015 and 2014.
Foreign currency exchange risk
We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries,
including Euro, British pound sterling and Canadian dollar. Changes in foreign currency exchange rates could
have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to
foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans
denominated in non-functional currencies. We have certain foreign currency exchange rate risk programs that use
foreign currency forward contracts and cross currency swaps. These forward contracts and cross currency swaps
are generally used to offset the potential income statement effects from intercompany loans denominated in non-
functional currencies. These programs reduce but do not entirely eliminate foreign exchange rate risk.
Derivatives Designated as Hedges
At March 31, 2016 and 2015, we had forward contracts to hedge the U.S. dollar against cash flows
denominated in Canadian dollars with total gross notional amounts of $323 million and $399 million, which were
designated as cash flow hedges. These contracts will mature between March 2017 and March 2020.
During the fourth quarter of 2016, we entered into cross currency swaps to convert fixed-rate British pound
sterling denominated borrowings to fixed-rate U.S. dollar borrowings. For our cross currency swap transactions,
we agree with another party to exchange, at specified intervals, one currency for another currency at a fixed
exchange rate, generally set at inception, calculated by reference to an agreed upon notional amount. The
notional amount of each currency is exchanged at the inception and termination of the currency swap by each
party. These cross currency swaps are designed to reduce the income statement effects from fluctuations in
foreign exchange rates and have been designated as cash flow hedges. The cross currency swaps mature from
February 2018 to March 2019 and have a total gross notional amount of approximately $546 million.
For forward contracts and currency swaps that are designated as cash flow hedges, the effective portion of
changes in the fair values of hedges is recorded into accumulated other comprehensive income and reclassified
into earnings in the same period in which the hedged transaction affects earnings. Changes in fair values
representing hedge ineffectiveness are recognized in current earnings. Gain or losses on these hedges recorded in
other comprehensive income and earnings were not material in 2016, 2015 and 2014.
Derivatives Not Designated as Hedges
We also have a number of forward contracts to primarily hedge the Euro against cash flows denominated in
British pound sterling and other European currencies. At March 31, 2016 and 2015, the total gross notional
amounts of these contracts were $876 million and $1,755 million.
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