Interpretation of Financial Statement Disclosures Following are excerpts from the footnotes to IBM Corporation's 2010 financial statements:
The company's operations generate significant nonfunctional currency, third-party vendor payments and intercompany payments for royalties and goods and services among the company's non-U.S. subsidiaries and with the parent company. In anticipation of these foreign currency cash flows and in view of the volatility of the currency markets, the company selectively employs foreign exchange forward contracts to manage its currency risk.
At December 31,2010 and 2009, in connection with cash flow hedges of anticipated royalties and cost transactions, the company recorded net losses of $147 million and of $718 million (before taxes), respectively, in accumulated other comprehensive income/(loss). Within these amounts $249 million and $427 million of losses, respectively, are expected to be reclassified to net income within the next 12 months, providing an offsetting economic impact against the underlying anticipated transactions.
Required
a. Explain how IBM uses forward contracts to reduce currency risk related to anticipated royalties and cost transactions.
b. If the hedges described above are net forward sale contracts, does IBM anticipate a net inflow or outflow of foreign currency related to its hedged royalty and cost transactions? Explain.
c. Again assuming the hedges are net forward sale contracts, on average did the U.S. dollar strengthen or weaken with respect to the currencies hedged in 2010 and 2009? How do you know?
d. For these cash flow hedges, where and when will the reclassification to income be recorded?