Visa 2015 Annual Report Download - page 120

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2015
Company’s derivative contracts outstanding in its hedge program were $1.2 billion at September 30,
2015 and 2014. As of September 30, 2015, the Company’s cash flow hedges in an asset position
totaled $76 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 hedge 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 2015, 2014
and 2013, the amounts by which earnings were reduced relating to excluded forward points were $29
million, $27 million and $14 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 $117 million pre-tax gains to earnings during fiscal 2016.
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, 2015, the Company has received collateral of $73 million from counterparties, which is
included in accrued liabilities on the consolidated balance sheet, and posted collateral of $4 million,
which is included in other assets. 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, 2015.
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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