These excerpts taken from the MRVL 10-Q filed Jun 11, 2009.
Derivative financial instruments
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133), must be adjusted to fair value through earnings. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income in shareholders equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.
For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges and for other derivatives not designated as hedging instruments under SFAS 133 that we use to hedge monetary assets or liabilities denominated in currencies other than the U.S. dollar, the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period.
Note 5. Derivative Financial Instruments
The Company manages its foreign currency exchange rate risk through foreign currency forward exchange contracts to hedge against the short-term impact of currency fluctuations. The Companys policy is to enter into foreign currency forward exchange contracts with maturities generally less than 12 months to mitigate the impact of currency exchange fluctuations on certain local currency denominated operating expenses. All derivatives are recorded at fair value in either prepaid and other current assets or other accrued liabilities. The Company reports cash flows from derivative instruments in cash flows from operating activities. The Company used quoted prices to value our derivative instruments.
As of May 2, 2009, the notional amounts of outstanding hedge contracts were as follows:
Cash Flow Hedges. The Company designates and documents its foreign currency forward exchange contracts as cash flow hedges on payroll-related costs denominated in Israeli shekels. The Company evaluates and calculates the effectiveness of each hedge at least quarterly, using the critical terms match method. The effective change is recorded in other comprehensive income (loss) (OCI) and is subsequently reclassified to payroll expense when the hedged expense is recognized. Ineffectiveness is recorded in other income/expense. In the event it becomes probable that the critical terms of the hedge and the hedged transaction will not match, effectiveness is measured using the dollar offset method and the gains or losses on the ineffective portion are immediately reclassified from accumulated other comprehensive income (loss) to other expense in the Condensed Consolidated Statement of Operations.
Other Foreign Currency Hedges. The Company enters into foreign currency forward exchange contracts to hedge certain vendor payments denominated in Israeli shekels that we do not designate and document as cash flow hedges. The maturities of these contracts are generally less than 12 months. Gains or losses arising from the remeasurement of these contracts to fair value each period are recorded in other expenses, net.
The fair value and balance sheet classification of foreign exchange contract derivatives are as follows:
The following tables summarize the pre-tax effect of foreign exchange contract derivatives by (a) cash flow hedges and (b) other foreign currency hedges on OCI and the Condensed Consolidated Statement of Operations for the three months ended May 2, 2009.
The Company anticipates reclassifying the accumulated loss recorded as of May 2, 2009 from OCI to payroll expense within 12 months.