Waste Management 2015 Annual Report Download - page 153

WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
on (i) other third-party investors’ recent transactions in the securities; (ii) other information available regarding
the current market for similar assets and/or (iii) a market or income approach as deemed appropriate.
Foreign Currency
We have operations in Canada as well as a cost center in India and investments in Hong Kong. Local
currencies generally are considered the functional currencies of our operations and investments outside the
United States. The assets and liabilities of our foreign operations are translated to U.S. dollars using the exchange
rate at the balance sheet date. Revenues and expenses are translated to U.S. dollars using the average exchange
rate during the period. The resulting translation difference is reflected as a component of comprehensive income.
Derivative Financial Instruments
We primarily use derivative financial instruments to manage our risk associated with fluctuations in interest
rates and foreign currency exchange rates. In prior years, we used interest rate swaps to maintain a strategic
portion of our long-term debt obligations at variable, market-driven interest rates or in anticipation of planned
senior note issuances to effectively lock in a fixed interest rate for those anticipated issuances. We use foreign
currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated
intercompany cash transactions between Waste Management Holdings, Inc., a wholly-owned subsidiary (“WM
Holdings”), and its Canadian subsidiaries. Prior to the sale of our Wheelabrator business in December 2014, we
used electricity commodity derivatives to mitigate the variability in our revenues and cash flows caused by
fluctuations in the market prices for electricity. The financial statement impacts of our derivatives are discussed
in Notes 8 and 14.
We obtain current valuations of our foreign currency hedging instruments from third-party pricing models.
The estimated fair values of derivatives used to hedge risks fluctuate over time and should be viewed in relation
to the underlying hedged transaction and the overall management of our exposure to fluctuations in the
underlying risks. The fair value of derivatives is included in other current assets, other long-term assets, current
accrued liabilities or other long-term liabilities, as appropriate. Any ineffectiveness present in either fair value or
cash flow hedges is recognized immediately in earnings without offset. There was no significant ineffectiveness
in 2015, 2014 or 2013.
•Foreign Currency Derivatives — Our foreign currency derivatives have been designated as cash flow
hedges for accounting purposes, which results in the unrealized changes in the fair value of the
derivative instruments being recorded in “Accumulated other comprehensive income” within the equity
section of our Consolidated Balance Sheets. The associated balance in other comprehensive income is
reclassified to earnings as the hedged cash flows affect earnings. In each of the periods presented, these
derivatives have effectively mitigated the impacts of the hedged transactions, resulting in immaterial
impacts to our results of operations for the periods presented.
•Interest Rate Derivatives — Our previously outstanding interest rate swaps associated with outstanding
fixed-rate senior notes had been designated as fair value hedges for accounting purposes. Accordingly,
derivative assets were accounted for as an increase in the carrying value of our underlying debt
obligations and derivative liabilities were accounted for as a decrease in the carrying value of our
underlying debt instruments. These fair value adjustments are deferred and recognized as an adjustment
to interest expense over the remaining term of the hedged instruments. Treasury locks and forward-
starting swaps executed in prior years were designated as cash flow hedges for accounting purposes.
The fair value of these derivative instruments were recorded in “Accumulated other comprehensive
income” within the equity section of our Consolidated Balance Sheets. The associated balance in other
comprehensive income is reclassified to earnings as the hedged cash flows occur.
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