Toro 2015 Annual Report Download - page 72

speculative purposes. The company also made an accounting pol- When it is determined that a derivative is not, or has ceased to be,
icy election to use the portfolio exception with respect to measur- highly effective as a hedge, the company discontinues hedge
ing counterparty credit risk for derivative instruments, and to mea- accounting prospectively. When the company discontinues hedge
sure the fair value of a portfolio of financial assets and financial accounting because it is no longer probable, but it is still reasona-
liabilities on the basis of the net open risk position with each bly possible that the forecasted transaction will occur by the end of
counterparty. The company’s primary currency exchange rate the originally expected period or within an additional two-month
exposures are with the Euro, the Australian dollar, the Canadian period of time thereafter, the gain or loss on the derivative remains
dollar, the British pound, the Mexican peso, the Japanese yen, the in AOCL and is reclassified to net earnings when the forecasted
Chinese Renminbi, and the Romanian New Leu against the U.S. transaction affects net earnings. However, if it is probable that a
dollar, as well as the Romanian New Leu against the Euro. forecasted transaction will not occur by the end of the originally
specified time period or within an additional two-month period of
Cash Flow Hedges. The company recognizes all derivative time thereafter, the gains and losses that were in AOCL are recog-
instruments as either assets or liabilities at fair value on the con- nized immediately in net earnings. In all situations in which hedge
solidated balance sheet and formally documents relationships accounting is discontinued and the derivative remains outstanding,
between cash flow hedging instruments and hedged transactions, the company carries the derivative at its fair value on the consoli-
as well as its risk-management objective and strategy for undertak- dated balance sheet, recognizing future changes in the fair value
ing hedge transactions. This process includes linking all derivatives in other income, net. For the fiscal years ended October 31, 2015
to the forecasted transactions, such as sales to third parties, for- and 2014, there were immaterial gains and losses on contracts
eign plant operations, and purchases from suppliers. Changes in reclassified into earnings as a result of the discontinuance of cash
fair values of outstanding cash flow hedge derivatives, except the flow hedges. As of October 31, 2015, the notional amount of out-
ineffective portion, are recorded in other comprehensive income standing forward contracts designated as cash flow hedges was
(‘‘OCI’’), until net earnings is affected by the variability of cash $103,740. Additionally, the company has one cross currency inter-
flows of the hedged transaction. Gains and losses on the deriva- est rate swap instrument outstanding as of October 31, 2015 for a
tive representing either hedge ineffectiveness or hedge compo- fixed pay notional of 36,593 Romanian New Leu and receive float-
nents excluded from the assessment of effectiveness are recog- ing notional of 8,500 Euro.
nized in net earnings. The consolidated statement of earnings
classification of effective hedge results is the same as that of the Derivatives Not Designated as Hedging Instruments. The
underlying exposure. Results of hedges of sales are recorded in company also enters into foreign currency contracts that include
net sales, and foreign plant operations and purchases of suppliers forward currency contracts and cross currency swaps to mitigate
are recorded in cost of sales when the underlying hedged transac- the remeasurement of specific assets and liabilities on the consoli-
tion affects net earnings. The maximum amount of time the com- dated balance sheet. These contracts are not designated as hedg-
pany hedges its exposure to the variability in future cash flows for ing instruments. Accordingly, changes in the fair value of hedges
forecasted trade sales and purchases is two years. Results of of recorded balance sheet positions, such as cash, receivables,
hedges of intercompany loans are recorded in other income, net payables, intercompany notes, and other various contractual claims
as an offset to the remeasurement of the foreign loan balance. to pay or receive foreign currencies other than the functional cur-
The company formally assesses, at a hedge’s inception and on rency, are recognized immediately in other income, net, on the
an ongoing basis, whether the derivatives that are designated as consolidated statements of earnings together with the transaction
hedges have been highly effective in offsetting changes in the gain or loss from the hedged balance sheet position.
cash flows of the hedged transactions and whether those deriva-
tives may be expected to remain highly effective in future periods.
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