Western Digital 2009 Annual Report Download - page 82

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These investments are currently accounted for as available-for-sale securities and recorded within other non-current assets
in the consolidated balance sheet.
Foreign Exchange Contracts. The Company’s foreign exchange contracts are short-term contracts to hedge the
Company’s foreign currency risk related to the Thai Baht, Malaysian Ringgit, Euro and the British Pound Sterling.
Foreign exchange contracts are classified within accrued expenses in the consolidated balance sheet.
The following table presents the changes in Level 3 instruments measured on a recurring basis for the fiscal year
ended July 3, 2009 (in millions).
U.S.
Government
Agency
Securities
Auction-rate
Securities Total
June 27, 2008 ....................................... $ 3 $28 $31
Redemptions ...................................... (2) — (2)
Other-than-temporary impairment recognized in earnings ....... — (10) (10)
July 3, 2009 ........................................ 1 18 19
The Company had no liabilities that are re-measured and reported at fair value on a recurring basis at July 3, 2009.
Note 11. Foreign Exchange Contracts
In the third quarter of 2009, the Company adopted SFAS 161. SFAS 161 amends and enhances the disclosure
requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), to
provide information about how and why an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and
related hedged items affect an entity’s financial position, financial performance and cash flows.
Although the majority of the Company’s transactions are in U.S. dollars, some transactions are based in various
foreign currencies. The Company purchases short-term, foreign exchange contracts to hedge the impact of foreign
currency exchange fluctuations on certain underlying assets, revenue, liabilities and commitments for operating expenses
and product costs denominated in foreign currencies. The purpose of entering into these hedging transactions is to
minimize the impact of foreign currency fluctuations on the Company’s results of operations. These contract maturity
dates do not exceed 12 months. All forward exchange contracts are for risk management purposes only. The Company
does not purchase short-term forward exchange contracts for trading purposes. Currently, the Company focuses on
hedging its foreign currency risk related to the Thai Baht, Malaysian Ringgit, Euro, and the British Pound Sterling.
Malaysian Ringgit contracts are designated as cash flow hedges. Euro and British Pound Sterling contracts are designated
as fair value hedges. Thai Baht contracts are designated as either cash flow or fair value hedges.
If a derivative is designated as a cash flow hedge, the effective portion of the change in fair value of the derivative is
initially deferred in other comprehensive income (loss), net of tax. These amounts are subsequently recognized into
earnings when the underlying cash flow being hedged is recognized into earnings. As of July 3, 2009, the net amount of
existing gains expected to be reclassified into earnings within the next twelve months was $2 million. The Company
determined the ineffectiveness associated with its cash flow hedges to be immaterial.
A change in the fair value of fair value hedges is recognized in earnings in the period incurred and is reported as a
component of operating expenses. All fair value hedges were determined to be effective as defined under SFAS 133. The
fair value and the changes in fair value on these contracts were not material to the consolidated financial statements.
As of July 3, 2009, the Company does not have any foreign exchange contracts with credit-risk-related contingent
features. The Company opened $1.4 billion, and closed $1.8 billion, in foreign exchange contracts for the year ended
76
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)