Medtronic 2009 Annual Report Download - page 81

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77
Medtronic, Inc.
The information that follows explains the various types of
derivatives and financial instruments used by the Company,
how and why the Company uses such instruments, how such
instruments are accounted for and how such instruments impact
the Company’s consolidated balance sheets and statements
of earnings.
Freestanding Derivative Forward Contracts
Freestanding derivative forward contracts are used to offset the
Company’s exposure to the change in value of certain foreign
currency denominated assets and liabilities. These derivatives
are not designated as hedges, and, therefore, changes in the
value of these forward contracts are recognized currently in
earnings, thereby offsetting the current earnings effect of the
related foreign currency denominated assets and liabilities.
The cash flows from these contracts are reported as operating
activities in the consolidated statements of cash flows. The gross
notional amount of these contracts, not designated as hedging
instruments, outstanding at April 24, 2009 was $1.162 billion.
The amount of gains and location of the gains in the
consolidated statement of earnings related to derivative
instruments not designated as hedging instruments for the fiscal
year ended April 24, 2009 were as follows:
(in millions)
Derivatives Not Designated as
Hedging Instruments under
SFAS No. 133 Location Amount
Foreign exchange contracts Other expense, net $208
Net Investment Hedges
Net investment hedges are used to hedge the long-term
investment (equity) in foreign operations. For hedges that meet
effectiveness requirements, the net gains/(losses) related to
changes in the current rates, or spot rates, are recorded as a
cumulative translation adjustment, a component of accumulated
other comprehensive (loss)/ income (AOCI) on the consolidated
balance sheets. Net gains/(losses) associated with changes in
forward rates of the contracts are reflected in other expense,
net in the consolidated statements of earnings. Recognition in
earnings of amounts previously recorded as a cumulative
translation adjustment is limited to circumstances such as
complete or substantially complete liquidation of the long-term
investment (equity) in foreign operations. The cash flows from
these contracts are reported as investing activities in the
consolidated statements of cash flows. As of April 24, 2009, there
were no open derivative contracts.
The amount of gains and location of the gains in the
consolidated statement of earnings and AOCI related to derivative
instruments designated as net investment hedges for the fiscal
year ended April 24, 2009 are presented in the table below. There
were no reclassifications of the effective portion of net investment
hedges out of AOCI into income for the fiscal year ended April
24, 2009.
(in millions)
Derivatives in
SFAS No. 133 Net
Investment
Hedging
Relationships
Gain Recognized
as Cumulative
Translation
within AOCI on
Effective Portion
of Derivative
Ineffective Portion of Gain
Recognized in Income on
Derivative and Amount
Excluded from Effectiveness
Testing
Amount Location Amount
Foreign exchange
contracts $27 Other expense, net $5
Cash Flow Hedges
Forward contracts designated as cash flow hedges are designed
to hedge the variability of cash flows associated with forecasted
transactions, denominated in a foreign currency that will take
place in the future. For derivative instruments that are designated
and qualify as a cash flow hedge, the effective portion of the gain
or loss on the derivative is reported as a component of AOCI and
reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. No gains or losses
relating to ineffectiveness of cash flow hedges were recognized in
earnings during fiscal years 2009, 2008 and 2007. No components
of the hedge contracts were excluded in the measurement of
hedge ineffectiveness and no hedges were derecognized or
discontinued during fiscal years 2009, 2008 and 2007. The cash
flows from these contracts are reported as operating activities in
the consolidated statements of cash flows. The gross notional
amount of these contracts, designated as cash flow hedges,
outstanding at April 24, 2009 was $4.134 billion and will mature
within the subsequent 36-month period.