Snapple 2009 Annual Report Download - page 103

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The Company formally designates and accounts for certain interest rate swaps and foreign exchange forward
contracts that meet established accounting criteria under U.S. GAAP as either fair value or cash flow hedges. For
derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on
the derivative instruments is recorded, net of applicable taxes, in Accumulated Other Comprehensive Loss
(“AOCL”), a component of Stockholders’ Equity in the Consolidated Balance Sheets. When net income is affected
by the variability of the underlying transaction, the applicable offsetting amount of the gain or loss from the
derivative instruments deferred in AOCL is reclassified to net income and is reported as a component of the
Consolidated Statements of Operations. For derivative instruments that are designated and qualify as fair value
hedges, the effective change in the fair value of these instruments, as well as the offsetting gain or loss on the hedged
item attributable to the hedged risk, are recognized immediately in current-period earnings. For derivatives that are
not designated or de-designated as a hedging instrument, the gain or loss on the instruments is recognized in
earnings in the period of change.
Certain interest rate swap agreements qualify for the “shortcut” method of accounting for hedges under
U.S. GAAP. Under the “shortcut” method, the hedges are assumed to be perfectly effective and no ineffectiveness is
recorded in earnings. For all other designated hedges, DPS assesses hedge effectiveness and measures hedge
ineffectiveness at least quarterly throughout the designated period. Changes in the fair value of the derivative
instruments that do not effectively offset changes in the fair value of the underlying hedged item or the variability in
the cash flows of the forecasted transaction throughout the designated hedge period are recorded in earnings each
period.
If fair value or cash flow hedges were to cease to qualify for hedge accounting or were terminated, it would
continue to be carried on the balance sheet at fair value until settled, but hedge accounting would be discontinued
prospectively. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCL are
reclassified to earnings at that time.
Interest Rates
Cash Flow Hedges
During 2008 and 2009, DPS utilized interest rate swaps designated as cash flow hedges to manage its exposure
to volatility in floating interest rates on borrowings under its Term Loan A that effectively converted variable
interest rates to fixed rates. The intent of entering into these interest rate swaps is to provide predictability in the
Company’s overall cost structure.
During the third quarter of 2008, the Company entered into interest rate swaps effective September 30, 2008,
with notional amounts of $500 million and $1.2 billion, respectively. The interest rate swap with the notional
amount of $500 million matured in March 2009. During the year ended December 31, 2009, DPS maintained the
other interest rate swaps with an aggregate notional amount of $1.2 billion, which matured in December 2009.
In February 2009, the Company entered into an interest rate swap effective December 31, 2009, with duration
of 12 months and a $750 million notional amount that amortized at the rate of $100 million every quarter. As the
Term Loan A was fully repaid in December 2009, the Company de-designated the cash flow hedge as this interest
rate swap no longer qualified for hedge accounting treatment and terminated $345 million of the original notional
amount of the interest rate swap. As the underlying forecasted hedged transaction ceased to exist with the
repayment of Term Loan A, losses of $7 million related to the interest rate swap that were accumulated in AOCL
were immediately recognized into earnings as interest expense in December 2009. There were no other cash flow
hedges discontinued during the year ended December 31, 2009 and the Company did not discontinue any cash flow
hedge relationships during the year ended December 31, 2008.
As of December 31, 2009, the remaining $405 million in notional amount of the interest rate swap had not been
terminated and is utilized in the interest rate risk management strategy around the Revolver.
83
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)