Visa 2013 Annual Report Download - page 108

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VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2013
program is mainly due to an increase in Visa’s forecasted net exposure, combined with the Company’s
decision to hedge a larger percentage of those forecasted net exposures. As of September 30, 2013,
the Company’s cash flow hedges in an asset position totaled $23 million and were classified in prepaid
expenses and other current assets on the consolidated balance sheet, while cash flow hedges in a
liability position totaled $13 million and were classified in accrued liabilities on the consolidated balance
sheet. These amounts are subject to master netting agreements, which provide the Company with a
legal right to net settle multiple payable and receivable positions with the same counterparty, in a
single currency through a single payment. However, the Company presents fair values on a gross
basis on the consolidated balance sheets. See Note 1—Summary of Significant Accounting Policies.
To qualify for cash flow hedge accounting treatment, the Company formally documents, at inception of
the hedge, all relationships between the hedging transactions and the hedged items, as well as the
Company’s risk management objective and strategy for undertaking various hedge transactions. The
Company also formally assesses whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in the cash flows of the hedged items and whether those derivatives may be
expected to remain highly effective in future periods.
The Company uses regression analysis to assess effectiveness prospectively and retrospectively.
The effectiveness tests are performed on the foreign exchange forward contracts based on changes in
the spot rate of the derivative instrument compared to changes in the spot rate of the forecasted
hedged transaction. Forward points are excluded for effectiveness testing and measurement purposes.
The excluded forward points are reported in earnings. For fiscal 2013, 2012 and 2011, the amounts by
which earnings were reduced relating to excluded forward points were $14 million, $16 million and
$20 million, respectively.
The effective portion of changes in the fair value of derivative contracts is recorded as a
component of accumulated other comprehensive income or loss on the consolidated balance sheets.
When the forecasted transaction occurs and is recognized in earnings, the amount in accumulated
other comprehensive income or loss related to that hedge is reclassified to operating revenue or
expense. The Company expects to reclassify $29 million pre-tax, to earnings during fiscal 2014.
The Company’s derivative financial instruments are subject to both credit and market risk. 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
significant. The Company mitigates this risk by entering into master netting agreements which require
each party to post collateral against its net liability position with the respective counterparty. As of
September 30, 2013, the Company has posted and received collateral of $4 million and $14 million,
respectively, with counterparties, which are included in prepaid and other current assets, and accrued
liabilities, respectively, on the consolidated balance sheet. Notwithstanding the Company’s efforts to
manage foreign exchange risk, there can be no absolute 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, 2013.
Additional disclosures that demonstrate how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows have not been presented
because the impact of derivative instruments is immaterial to the overall consolidated financial
statements.
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