Medtronic 2016 Annual Report Download - page 75

Table of Contents
Medtronic plc
Notes to Consolidated Financial Statements (Continued)
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other alternatives to provide these therapies. If the related R&D project is not completed in a timely manner or the R&D project
is terminated or abandoned, the Company may have an impairment related to the IPR&D, calculated as the excess of the asset’s
carrying value over its fair value.
Contingent Consideration The Company recognizes contingent consideration at fair value at the date of acquisition based on
the consideration expected to be transferred, estimated as the probability-weighted future cash flows, discounted back to present
value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methodologies. The
fair value of the contingent consideration is remeasured each reporting period with the change in fair value, including accretion
for the passage of time, recognized as income or expense within acquisition-related items in the consolidated statements of income.
Derivatives U.S. GAAP requires companies to recognize all derivatives as assets and liabilities on the balance sheet and to
measure the instruments at fair value through earnings unless the derivative qualifies for hedge accounting. If the derivative qualifies
for hedge accounting, depending on the nature of the hedge and hedge effectiveness, changes in the fair value of the derivative
will either be recognized immediately in earnings or recorded in other comprehensive income (loss) until the hedged item is
recognized in earnings upon settlement/termination. The changes in the fair value of the derivative are intended to offset the change
in fair value of the hedged asset, liability, or probable commitment. The Company evaluates hedge effectiveness at inception and
on an ongoing basis. If a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge
ineffectiveness, if any, is recorded in earnings. Cash flows from derivative contracts are reported as operating activities in the
consolidated statements of cash flows.
The Company uses operational and economic hedges, as well as currency exchange rate derivative contracts and interest rate
derivative instruments, to manage the impact of currency exchange and interest rate changes on earnings and cash flows. In addition,
the Company uses cross currency interest rate swaps to manage currency risk related to certain debt. In order to minimize earnings
and cash flow volatility resulting from currency exchange rate changes, the Company enters into derivative instruments, principally
forward currency exchange rate contracts. These contracts are designed to hedge anticipated transactions in another currency and
changes in the value of specific assets and liabilities. At inception of the contract, the derivative is designated as either a freestanding
derivative or a cash flow hedge. The primary currencies of the derivative instruments are the Euro and the Japanese Yen. The
Company does not enter into currency exchange rate derivative contracts for speculative purposes. All derivative instruments that
qualify for hedge accounting are recorded at fair value on the consolidated balance sheets, as a component of prepaid expenses
and other current assets, other assets, other accrued expenses, or other long-term liabilities depending upon the gain or loss
position of the contract and contract maturity date.
Forward contracts designated as cash flow hedges are designed to hedge the variability of cash flows associated with forecasted
transactions denominated in another 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 instrument is reported as a component of
accumulated other comprehensive (loss) income. The effective portion of the gain or loss on the derivative instrument is reclassified
into earnings and is included in other expense, net or cost of products sold in the consolidated statements of income, depending
on the underlying transaction that is being hedged, in the same period or periods during which the hedged transaction affects
earnings.
The Company uses freestanding derivative contracts to offset its exposure to the change in value of specific non-U.S. dollar currency
denominated assets and liabilities and to offset variability of cash flows associated with forecasted transactions denominated other
currencies. These derivatives are not designated as hedges, and therefore, changes in the value of these contracts are recognized
in earnings, thereby offsetting the current earnings effect of the related change in value of non-U.S dollar denominated assets and
liabilities.
The Company uses forward starting interest rate derivative instruments designated as cash flow hedges to manage the exposure
to interest rate volatility with regard to future issuances of fixed-rate debt. The effective portion of the gains or losses on the forward
starting interest rate derivative instruments that are designated and qualify as cash flow hedges are reported as a component of
accumulated other comprehensive (loss) income. Beginning in the period in which the planned debt issuance occurs and the related
derivative instruments are terminated, the effective portion of the gains or losses are then reclassified into interest expense, net
over the term of the related debt. Any portion of the gains or losses that are determined to be ineffective are immediately recognized
in interest expense, net.
The Company uses interest rate derivative instruments designated as fair value hedges to manage the exposure to interest rate
movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the
Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by
reference to agreed-upon notional principal amounts. Changes in the fair value of the derivative instrument are recorded in interest