Visa 2008 Annual Report Download - page 151

Table of Contents
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2008
(in millions, except as noted)
and the Company expects to reclassify the entire amount to the consolidated statement of operations during fiscal 2009 due to the recognition in earnings of
the hedged forecasted transactions.
The Company excludes time value for effectiveness testing and measurement purposes. The excluded time value is reported immediately in earnings.
For fiscal 2008, the amount recorded in earnings related to excluded time value was $2 million and there were no foreign currency contracts outstanding under
cash flow hedges as of September 30, 2008. Visa U.S.A. did not have any material derivative instruments in fiscal 2007.
The Company assesses effectiveness prospectively using regression analysis and retrospectively using a dollar ratio test. The effectiveness tests are
performed on the foreign exchange forward and option contracts based on changes in the spot rate of the derivative instrument compared to changes in the
spot rate of the forecasted hedged transaction. In the event there is recognized ineffectiveness or the underlying forecasted transaction does not occur within
the designated hedge period or it becomes remote that the forecasted transaction will occur, the related gains and losses on the cash flow hedges are
reclassified from accumulated other comprehensive income on the consolidated balance sheet to other income (expense) on the consolidated statement of
operations at that time.
Balance Sheet Hedges
The Company also uses forward foreign exchange contracts to economically hedge certain non-functional currency liabilities to reduce the risk that
results of operations and cash flows will be adversely affected by changes in foreign currency exchange rates. These forward contracts are not designated for
hedge accounting. Accordingly, all changes in fair value of these derivatives are recognized in the consolidated statement of operations. At September 30,
2008, the USD notional amount of the Company's foreign currency forward contracts under balance sheet hedges is $4 million with less than $1 million
unrealized losses. Prior to the reorganization, Visa U.S.A. did not engage in balance sheet hedges and there were no comparable balances presented at
September 30, 2007.
The Company's derivative financial instruments are subject to both credit and market risk. Credit risk is the risk of loss due to failure of the
counterparty to perform its obligations in accordance with contractual terms. Market risk is the potential change in an investment's value caused by
fluctuations in interest and currency exchange rates, credit spreads or other variables. The Company monitors the credit-worthiness of the financial institutions
that are counterparties to its derivative financial instruments and does not consider the risks of counterparty nonperformance to be material. Notwithstanding
the Company's efforts to manage foreign exchange risk, there can be no assurance that its hedging activities will adequately protect against the risks
associated with foreign currency fluctuations. Credit and market risks related to derivative instruments were not considered significant at September 30, 2008.
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