Toshiba 2008 Annual Report Download - page 108

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Notes to Consolidated Financial Statements
Toshiba Corporation and Subsidiaries
March 31, 2008
19. FINANCIAL INSTRUMENTS
(1) DERIVATIVE FINANCIAL INSTRUMENTS
The Company operates internationally, giving rise to exposure to market risks from fluctuations in foreign currency exchange and
interest rates. In the normal course of its risk management efforts, the Company employs a variety of derivative financial instruments,
which are consisted principally of forward exchange contracts, interest rate swap agreements, currency swap agreements, and curren-
cy options to reduce its exposures. The Company has policies and procedures for risk management and the approval, reporting and
monitoring of derivative financial instruments. The Company’s policies prohibit holding or issuing derivative financial instruments
for trading purposes.
The counterparties to the Company’s derivative transactions are financial institutions of high credit standing. The Company does
not anticipate any credit loss from nonperformance by the counterparties to forward exchange contracts, interest rate swap agree-
ments, currency swap agreements and currency options.
The Company has entered into forward exchange contracts with financial institutions as hedges against fluctuations in foreign
currency exchange rates on monetary assets and liabilities denominated in foreign currencies. The forward exchange contracts related
to accounts receivable and payable, and commitments on future trade transactions denominated in foreign currencies, mature pri-
marily within a few years of the balance sheet date.
Interest rate swap agreements, currency swap agreements and currency options are used to limit the Company’s exposure to losses
in relation to underlying debt instruments and accounts receivable and payable denominated in foreign currencies resulting from
adverse fluctuations in foreign currency exchange and interest rates. These agreements mature during the period 2008 to 2015.
Forward exchange contracts, interest rate swap agreements, currency swap agreements and currency options are designated as
either fair value hedges or cash flow hedges depending on accounts receivable and payable denominated in foreign currencies or com-
mitments on future trade transactions and the interest rate characteristics of the underlying debt as discussed below.
Fair Value Hedge Strategy
The forward exchange contracts and currency swap agreements utilized by the Company effectively reduce fluctuation in fair
value of accounts receivable and payable denominated in foreign currencies.
The interest rate swap agreements utilized by the Company effectively convert a portion of its fixed-rate debt to a floating-
rate basis.
Cash Flow Hedge Strategy
The forward exchange contracts and currency options utilized by the Company effectively reduce fluctuation in cash flow from
commitments on future trade transactions denominated in foreign currencies for the next 7 years.
The interest rate swap agreements utilized by the Company effectively convert a portion of its floating-rate debt to a fixed-
rate basis for the next 7 years.
The Company expects to reclassify ¥82 million ($820 thousand) of net gains on derivative financial instruments from accu-
mulated other comprehensive income (loss) to earnings during the next 12 months due to the collection of accounts receivable
denominated in foreign currencies and the payments of accounts payable denominated in foreign currencies and variable inter-
est associated with the floating-rate debts.
At March 31, 2008, there were no significant gains or losses on derivative financial instruments or portions thereof that were
either ineffective as hedges, excluded from assessment of hedge effectiveness, or where the underlying risk did not occur.
The Company’s forward exchange contract amounts, the aggregate notional principal amounts of interest rate swap agree-
ments, currency swap agreements, and currency options outstanding at March 31, 2008 and 2007 are summarized below:
Thousands of
Millions of yen U.S. dollars
March 31 2008 2007 2008
Forward exchange contracts:
To sell foreign currencies ¥329,575 ¥225,965 $3,295,750
To buy foreign currencies 330,063 156,092 3,300,630
Interest rate swap agreements 241,550 253,450 2,415,500
Currency swap agreements 133,136 161,362 1,331,360
Currency options 8,817 18,408 88,170