Toro 2011 Annual Report Download - page 43

total of comprehensive income, the components of net income,
ITEM 7A. QUANTITATIVE AND QUALITATIVE
and the components of other comprehensive income either in a
DISCLOSURES ABOUT MARKET RISK
single continuous statement of comprehensive income or in two
separate but consecutive statements. In both choices, an entity is We are exposed to market risk stemming from changes in foreign
required to present each component of net income along with total currency exchange rates, interest rates, and commodity prices. We
net income, each component of other comprehensive income along are also exposed to equity market risk pertaining to the trading
with a total for other comprehensive income, and a total amount price of our common stock. Changes in these factors could cause
for comprehensive income. The guidance eliminates the option to fluctuations in our earnings and cash flows. See further discussion
present the components of other comprehensive income as part of on these market risks below.
the statement of changes in stockholders’ equity. The amended Foreign Currency Exchange Rate Risk. In the normal course of
guidance is effective for fiscal years, and interim periods within business, we actively manage the exposure of our foreign currency
those years, beginning after December 15, 2011, and is to be exchange rate market risk by entering into various hedging instru-
applied retrospectively. We will adopt this guidance at the begin- ments, authorized under company policies that place controls on
ning of our first quarter of fiscal year 2013, as required. The adop- these activities, with counterparties that are highly rated financial
tion of this guidance is not expected to have a material impact on institutions. Our hedging activities involve the primary use of for-
our consolidated financial statements. ward currency contracts. Additionally, in fiscal 2011, we imple-
In May 2011, the FASB issued ASU No. 2011-04, Fair Value mented cross currency swaps to offset intercompany loan expo-
Measurement (Topic 820): Amendments to Achieve Common Fair sures. We use derivative instruments only in an attempt to limit
Value Measurement and Disclosure Requirements in U.S. GAAP underlying exposure from currency fluctuations and to minimize
and IFRS. The amendments result in a consistent definition of fair earnings and cash flow volatility associated with foreign currency
value and common requirements for measurement of and disclo- exchange rate changes and not for trading purposes. We are
sure about fair value between U.S. GAAP and International Finan- exposed to foreign currency exchange rate risk arising from trans-
cial Reporting Standards. The amendments clarify the application actions in the normal course of business, such as sales to third
of existing fair value measurement and disclosure requirements, party customers, sales and loans to wholly owned foreign subsidi-
including: a) application of the highest and best use and valuation aries, foreign plant operations, and purchases from suppliers.
premise concepts, b) measurement of the fair value of an instru- Because our products are manufactured or sourced primarily from
ment classified in a reporting entity’s shareholders equity, and the United States and Mexico, a stronger U.S. dollar and Mexican
c) quantitative disclosure about the unobservable inputs used in a peso generally have a negative impact on our results from opera-
fair value measurement that is categorized within Level 3 of the tions, while a weaker dollar and peso generally have a positive
fair value hierarchy. The amendments also change a particular effect. Our primary currency exchange rate exposures are with the
principle or requirement for fair value measurement and disclosure, Euro, the Australian dollar, the Canadian dollar, the British pound,
including: a) measurement of the fair value of financial instruments the Mexican peso, the Japanese yen, and the Chinese Yuan
that are managed within a portfolio, b) application of premiums and against the U.S. dollar. We also have exposure with the Romanian
discounts in a fair value measurement, and c) additional disclosure New Lei against the Euro and the U.S. dollar as a result of our
about fair value measurements. The amendments are effective new manufacturing facility in Romania.
during interim and annual periods beginning after December 15, We enter into various contracts, principally forward contracts that
2011, and are to be applied prospectively. We will adopt the change in value as foreign currency exchange rates change, to
amendments of ASU No. 2011-04 at the beginning of our second protect the value of existing foreign currency assets, liabilities,
quarter of fiscal year 2012, as required. The adoption of this guid- anticipated sales, and probable commitments. Decisions on
ance is not expected to have a material impact on our disclosures. whether to use such contracts are made based on the amount of
No other new accounting pronouncement that has been issued exposures to the currency involved and an assessment of the
but not yet effective for us during fiscal 2011 has had or is near-term market value for each currency. Worldwide foreign cur-
expected to have a material impact on our consolidated financial rency exchange rate exposures are reviewed monthly. The gains
statements. and losses on these contracts offset changes in values of the
related exposures. Therefore, changes in values of these hedge
instruments are highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over
the life of the hedge contract. Further information regarding gains
and losses on our derivative instruments is presented in Note 14 of
the Notes to Consolidated Financial Statements.
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