SanDisk 2013 Annual Report Download - page 183

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3: Derivatives and Hedging Activities
The Company uses derivative instruments primarily to manage exposures to foreign currency. The
Company’s primary objective in holding derivative instruments is to reduce the volatility of earnings and
cash flows associated with changes in foreign currency. The program is not designated for trading or
speculative purposes. The Company’s derivative instruments expose the Company to credit risk to the
extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to
mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk
across several major financial institutions. In addition, the potential risk of loss with any one counterparty
resulting from this type of credit risk is monitored by the Company on an ongoing basis.
The Company recognizes derivative instruments as either assets or liabilities on the balance sheet at
fair value and provides qualitative disclosures about objectives and strategies for using derivative
instruments, quantitative disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative agreements.
Changes in fair value (i.e., gains or losses) of the derivatives are recorded as cost of revenue or other
income (expense), or as other comprehensive income (‘‘OCI’’). The Company does not offset or net the
fair value amounts of derivative instruments and separately discloses the fair value amounts of the
derivative instruments as either assets or liabilities.
Cash Flow Hedges. The Company uses foreign exchange forward contracts designated as cash flow
hedges to hedge a portion of future forecasted wafer purchases and R&D expenses in Japanese yen. The
gain or loss on the effective portion of a cash flow hedge is initially reported as a component of AOCI and
subsequently reclassified into cost of revenue or R&D expense in the same period or periods in which the
cost of revenue or R&D expenses are recognized, or reclassified into other income (expense) if the hedged
transaction becomes probable of not occurring. Any gain or loss after a hedge is no longer designated,
because it is no longer probable of occurring or it is related to an ineffective portion of a cash flow hedge,
as well as any amount excluded from the Company’s hedge effectiveness, is recognized as other income
(expense) immediately. As of December 29, 2013, the notional amount and unrealized loss on the effective
portion of the Company’s outstanding foreign exchange forward contracts to purchase Japanese yen that
are designated as cash flow hedges are shown in both Japanese yen (in billions) and U.S. dollar (in
thousands), based upon the exchange rate as of December 29, 2013, as follows:
Unrealized
Notional Amount Loss
(Japanese yen) (U.S. dollar) (U.S. dollar)
Foreign exchange forward contracts:
Maturities 12 months or less ...................... ¥ 69.4 $ 662,190 $ (38,375)
Maturities greater than 12 months .................. 0.2 2,295 (118)
Total ................................... ¥ 69.6 $ 664,485 $ (38,493)
The forward contracts with maturities greater than 12 months will settle by January 2015.
Other Derivatives. Other derivatives that are non-designated consist primarily of foreign exchange
forward contracts to minimize the risk associated with the foreign exchange effects of revaluing monetary
assets and liabilities. Monetary assets and liabilities denominated in foreign currencies and the associated
outstanding foreign exchange forward contracts were marked-to-market at December 29, 2013 with
realized and unrealized gains and losses included in other income (expense). As of December 29, 2013, the
Company had foreign exchange forward contracts hedging exposures in European euros, British pounds
and Japanese yen. Foreign exchange forward contracts were outstanding to buy and sell U.S. dollar
F-17
Annual Report