The Company, in the normal course of business, is exposed to market risks from changes in interest rates, foreign exchange rates and commodity prices. To manage the exposures to these risks, the Company generally identifies its net exposures and takes advantage of natural offsets. Additionally, the Company enters into various derivative transactions pursuant to the Company's risk management policies in response to counterparty exposure and to hedge specific risks.
The types of derivatives used by the Company are primarily interest rate swaps, forward exchange contracts, currency swaps and commodity futures contracts. The changes in the fair value or cash flows of these derivatives are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. Whenever practical, designation is performed on a specific exposure basis to qualify for hedge accounting. In these circumstances, the Company assesses, both at the inception of the hedge and on an on-going basis, whether the hedging derivatives are highly effective in offsetting changes in fair values or cash flows of hedged items. Should it be determined that a derivative is not highly effective as a hedge, the Company will discontinue hedge accounting.
Fair value hedge
Derivative instruments designated as fair value hedges primarily consist of interest rate swaps used to convert fixed-rate assets or debt obligations to floating-rate assets or debts, and currency swaps used to hedge foreign currency risks of loans or debts.
Cash flow hedge
Derivative instruments designated as cash flow hedges include interest rate swaps to convert floating-rate liabilities to fixed-rate liabilities to diminish volatility of cash flows, forward exchange contracts to eliminate variability in functional-currency-equivalent cash flows on forecasted transactions, and commodity swaps or futures to eliminate variability in commodity prices.
Current open contracts hedge the Company's exposure to the variability in future cash flows for forecasted transactions through 2020.
Hedge of the net investment in foreign operations
The Parent uses foreign exchange contracts and non-derivative financial instruments such as foreign-currency-denominated debt in order to reduce the foreign currency exposure in the net investment in a foreign operation.
Impact of hedging activities on the consolidated statement of financial position
The following are the fair values (on a gross basis) of derivative instruments and non-derivative financial instruments designated as hedge at the Date of Transition, March 31, 2013 and 2014.
(Date of Transition)
Derivatives designated as fair value hedges, cash flow hedges and net investment hedges
Account in the consolidated statement of financial position
Millions of Yen Fair value Fair value
hedge Cash flow hedge Net investment hedge Total Interest rate contracts Other financial assets (current)
Other financial assets (non-current) 68,917 ¥356 ¥32 68,949 ¥356 Foreign exchange contracts Other financial assets (current)
Other financial assets (non-current) 1,912 580 7,246 63 ¥30 1,975 7,856 Commodity contracts Other financial assets (current)
Account in the consolidated statement of financial position
Millions of Yen Fair value Fair value
hedge Cash flow hedge Net investment hedge Total
Interest rate contracts Other financial liabilities (current)
Other financial liabilities (non-current) 5,539 ¥14 1,368 ¥5 6,907 ¥19 Foreign exchange
contracts Other financial liabilities (current) Other financial liabilities (non-current) 1,174 1,096 4,262 2,182 ¥17,302 22,738 3,278
Commodity contracts Other financial liabilities (current)
Other financial liabilities (non-current) 1,668 830 1,668 830
Total ¥7,823 ¥10,315 ¥17,302 ¥35,440
Non-derivative financial instruments designated as net investment hedges Hedging instrument
Account in the consolidated statement of financial position
Carrying amount (Millions of Yen) Foreign-currency-denominated
debt Borrowings (current) Borrowings (non-current) 35,506 ¥3,945
(March 31, 2013)
Derivatives designated as fair value hedges, cash flow hedges or net investment hedges
Account in the consolidated statement of financial position
Millions of Yen Fair value Fair value hedge Cash flow hedge Net investment hedge Total
Interest rate contracts Other financial assets (current)
Other financial assets (non-current) 82,383 ¥992 ¥25 82,408 ¥992 Foreign exchange contracts Other financial assets (current)
Other financial assets (non-current) 1,115 992 13,323 1,921 ¥1,495 15,933 2,913 Commodity contracts Other financial assets (current)
Other financial assets (non-current) 1,812 928 1,812 928
Total ¥85,482 ¥18,009 ¥1,495 ¥104,986
Account in the consolidated statement of financial position
Millions of Yen Fair value Fair value hedge Cash flow hedge Net investment hedge Total
Interest rate contracts Other financial liabilities (current)
Other financial liabilities (non-current) 2,533 ¥29 1,934 ¥11 4,467 ¥40 Foreign exchange
contracts Other financial liabilities (current) Other financial liabilities (non-current) 31 3,623 11 ¥9,546 13,200 11
Commodity contracts Other financial liabilities (current)
Other financial liabilities (non-current) 3,052 145 3,052 145
Total ¥2,593 ¥8,776 ¥9,546 ¥20,915
Non-derivative financial instruments designated as net investment hedges Hedging instrument
Account in the consolidated statement of Financial Position
Carrying amount (Millions of Yen) Foreign-currency-denominated
(March 31, 2014)
Derivatives designated as fair value hedges, cash flow hedges or net investment hedges
Account in the consolidated statement of financial position
Millions of Yen Fair value Fair value
hedge Cash flow hedge Net investment hedge Total
Interest rate contracts Other financial assets (current)
Other financial assets (non-current) 69,677¥935 ¥36 424 70,101¥971 Foreign exchange
contracts Other financial assets (current) Other financial assets (non-current) 679267 7,212 6 ¥4,955 12,846273
Commodity contracts Other financial assets (current)
Other financial assets (non-current) 476 620 476620
Total ¥71,558 ¥8,774 ¥4,955 ¥85,287
Account in the consolidated statement of financial position
Millions of Yen Fair value Fair value
hedge Cash flow hedge Net investment hedge Total
Interest rate contracts Other financial liabilities (current)
Other financial liabilities (non-current) 3,947¥82 1,194 ¥292 5,141¥374 Foreign exchange
contracts Other financial liabilities (current) Other financial liabilities (non-current) 230 5,870 747 ¥2,718 8,818747
Commodity contracts Other financial liabilities (current)
Other financial liabilities (non-current) 3,009 443 4433,009
Total ¥4,259 ¥11,555 ¥2,718 ¥18,532
Account in the consolidated statement of financial position
Millions of U.S. Dollars Fair value Fair value hedge Cash flow hedge Net investment hedge Total
Interest rate contracts Other financial assets (current)
Other financial assets (non-current) 676$9 $4 680$9
Foreign exchange
contracts Other financial assets (current) Other financial assets (non-current) 73 70 $48 1253
Commodity contracts Other financial assets (current)
Other financial assets (non-current) 5 6 56
Total $695 $85 $48 $828
Account in the consolidated statement of financial position
Millions of U.S. Dollars Fair value Fair value
hedge Cash flow hedge Net investment hedge Total
Interest rate contracts Other financial liabilities (current)
Other financial liabilities (non-current) $138 $3 12 $450
Foreign exchange
Non-derivative financial instruments designated as net investment hedges
Hedging instrument
Account in the consolidated statement of financial position
Carrying amount (Millions of Yen) Carrying amount (Millions of U.S. Dollars) Foreign-currency-denominated
debt Borrowings (current) Borrowings (non-current) ¥4,940 9,596 $4893
Impact of hedging activities on the consolidated statement of income and on other comprehensive income The following are the gains or losses related to hedging activities for the years ended March 31, 2013 and 2014.
(Year ended March 31, 2013)
Derivatives designated as fair value hedges
Millions of Yen
Derivative type
Account in the consolidated statement of income
Amount of gain or loss recognized in net income on
derivative
Amount of gain or loss recognized in net income on
hedged item Interest rate contracts
Foreign exchange contracts Other income (expense) -netOther income (expense) -net ¥17,093 1,047 ¥(17,087) (1,086)
Derivatives designated as cash flow hedges
Derivative type
Amount of gains (losses) recognized in OCI (effective portion) (Millions of Yen)
Account of gain or loss reclassified from other
components of equity
Amount of gain or loss reclassified from other components of equity into net
income (effective portion) (Millions of Yen)
Interest rate contracts ¥(8,686) Finance costs ¥(352)
Foreign exchange contracts 16,522 Other income (expense) - net 8,284
Commodity contracts 1,235 Revenues/(Cost of revenues) (2,288)
*1. Amounts related to hedge ineffectiveness or excluded from the assessment of hedge effectiveness was immaterial for the year ended March 31, 2013. *2. During the year ended March 31, 2013, there were no gains or losses reclassified from other components of equity into net income as a result of the
discontinuance of cash flow hedges because it was probable that the original forecasted transactions would not occur by the end of the originally specified time period.
Derivatives designated as net Investment hedges
The amounts related to hedge ineffectiveness or excluded from the assessment of hedge effectiveness was not material for the year ended March 31, 2013.
(Year ended March 31, 2014)
Derivatives designated as fair value hedges
Millions of Yen
Derivative type
Account in the consolidated statement of income
Amount of gain or loss recognized in net income on
derivative
Amount of gain or loss recognized in net income on
hedged item Interest rate contracts
Foreign exchange contracts Other income (expense) -netOther income (expense) -net ¥(14,230) (1,360) ¥14,222 1,346
Millions of U.S. Dollars
Derivative type
Account in the consolidated statement of income
Amount of gain or loss recognized in net income on
derivative
Amount of gain or loss recognized in net income on
hedged item Interest rate contracts
Foreign exchange contracts Other income (expense) -netOther income (expense) -net $(138) (13) $138 13
Derivatives designated as cash flow hedges
Derivative type
Amount of gains (losses) recognized in OCI (effective portion) (Millions of Yen)
Account of gain or loss reclassified from other
components of equity
Amount of gain or loss reclassified from other components of equity into net
income (effective portion) (Millions of Yen)
Interest rate contracts ¥7,567 Finance costs ¥(247)
Foreign exchange contracts
(23,456) Other income (expense) - net (13,668)
Commodity contracts (245) Revenues/(Cost of revenues) (28)
Derivative type
Amount of gains (losses) recognized in OCI (effective portion) (Millions of U.S. Dollars)
Account of gain or loss reclassified from other
components of equity
Amount of gain or loss reclassified from other components of equity into net
income (effective portion) (Millions of U.S. Dollars)
Interest rate contracts $73 Finance costs $(2)
Foreign exchange contracts (228) Other income (expense) - net (133)
Commodity contracts (2) Revenues/(Cost of revenues)
*1. Amounts related to hedge ineffectiveness or excluded from the assessment of hedge effectiveness was immaterial for the year ended March 31, 2014. *2. During the year ended March 31, 2014, there were no gains or losses reclassified from other components of equity into net income as a result of the
discontinuance of cash flow hedges because it was probable that the original forecasted transactions would not occur by the end of the originally specified time period.
Derivatives designated as net investment hedges
The amounts related to hedge ineffectiveness or excluded from the assessment of hedge effectiveness was not material for the year ended March 31, 2014.
32. RISK MANAGEMENT RELATED TO FINANCIAL INSTRUMENTS