iHeartMedia 2003 Annual Report Download - page 65

Derivative Instruments and Hedging Activities
Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, (“Statement 133”), requires the
Company to recognize all of its derivative instruments as either assets or liabilities in the consolidated balance sheet at fair value. The
accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging
relationship, and further, on the type of hedging relationship. For derivative instruments that are designated and qualify as hedging instruments,
the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge
of a net investment in a foreign operation. The Company formally documents all relationships between hedging instruments and hedged items,
as well as its risk management objectives and strategies for undertaking various hedge transactions. The Company formally assesses, both at
inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting
changes in either the fair value or cash flows of the hedged item. If a derivative ceases to be a highly effective hedge, the Company
discontinues hedge accounting. The Company accounts for its derivative instruments that are not designated as hedges at fair value, with
changes in fair value recorded in earnings. The Company does not enter into derivative instruments for speculation or trading purposes.
The Company has two types of hedges, fair value and cash flow hedges. The Company’s interest rate swap agreements are fair value hedges
which the Company accounts for using the short-cut method in accordance with Statement 133. These agreements involve the exchange of
amounts based on fixed interest rates for amounts based on variable interest rates over the life of the agreement without an exchange of the
notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized
as an adjustment to interest expense related to the debt. The fair value of the swap agreements and changes in the fair value as a result of
changes in market interest rates are recognized in these consolidated financial statements.
The Company’s cash flow hedge is a net purchased option used to limit the Company’s exposure to and benefit from price fluctuations in XM
Satellite Radio Holdings, Inc. (“XMSR”) over the term of a secured forward exchange contract. Under this contract, the Company received an
initial payment based upon the fair value of XMSR at inception of the contract and requires the Company to deliver XMSR shares or cash at
maturity of the contract. The net purchased option meets the criteria in Statement 133 Implementation Issue G20, Assessing and Measuring the
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ffectiveness of a Purchased Option Used in a Cash Flow Hedge, and is recorded at fair value in the consolidated balance sheet with changes
in fair value recorded to other comprehensive income. No amounts are expected to be reclassified into earnings during the term of the contract.
The Company has entered into an additional secured forward exchange contract involving its investment in American Tower Corporation
(“AMT”) that meets the definition of a derivative instrument under Statement 133. Under this contract, the Company received an initial
payment based upon the fair value of AMT at inception of the contract and requires the Company to deliver AMT shares or cash at maturity of
the contract. The contract limits the Company’s exposure to and benefits from price fluctuations in AMT over the term of the contract. The
contract is recorded at fair value in the consolidated balance sheet with changes in fair value recorded to “Gain (loss) on marketable securities”
in the consolidated statements of operations.
Foreign Currency
Results of operations for foreign subsidiaries and foreign equity investees are translated into U.S. dollars using the average exchange rates
during the year. The assets and liabilities of those subsidiaries and investees, other than those of operations in highly inflationary countries, are
translated into U.S. dollars using the exchange rates at the balance sheet date. The related translation adjustments are recorded in a separate
component of shareholders’ equity, “Accumulated other comprehensive loss”. Foreign currency transaction gains and losses, as well as gains
and losses from translation of financial statements of subsidiaries and investees in highly inflationary countries, are included in operations.
Advertising Expense
The Company records advertising expense as it is incurred. Advertising expenses of $294.0 million, $256.4 million and $228.5 million were
recorded during the year ended December 31, 2003, 2002 and 2001, respectively.
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