Accounting For Derivative Instruments And Hedging Activities

9 Months Ended

Sep. 30, 2011

Accounting For Derivative Instruments And Hedging Activities

Accounting For Derivative Instruments And Hedging Activities

10. Accounting for Derivative Instruments and Hedging Activities

The Company has significant international revenues and expenses, and related receivables and payables, denominated in currencies other than the functional currency of the related subsidiary. As a result, the Company's operating results can be affected by changes in foreign currency exchange rates. In an effort to minimize this risk, from time to time, the Company purchases foreign currency option and forward contracts as hedges against anticipated and recorded transactions, and the related receivables and payables denominated in foreign currencies. The Company only uses foreign currency option and forward contracts as hedges to minimize the variability in the Company's operating results arising from foreign currency exchange rate movements and not for speculative or trading purposes.

The Company recognizes changes in the fair value of the effective portion of foreign exchange derivatives that are designated and qualify as cash flow hedges of forecasted revenue and expense transactions in accumulated other comprehensive income, or OCI. The Company reclassifies these amounts from OCI and recognizes them in earnings when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur. The Company reclassifies OCI associated with hedges of foreign currency revenue into direct costs upon recognition of the forecasted transaction in the statements of income. The Company recognizes the ineffective portion of a derivative instrument in earnings in the current period as a component of other income, and measures it by comparing the fair value of the forward contract to the change in the forward value of the anticipated transaction. Hedging portfolio ineffectiveness during the three months ended September 30, 2010 and 2011 was a gain of $0.3 million and a loss of $0.1 million, respectively. Hedging portfolio ineffectiveness during the nine months ended September 30, 2010 and 2011 was a gain of $0.1 million and $44,000, respectively.

The Company also manages its exposure on receivables and payables denominated in currencies other than the entity's functional currency through the use of natural hedges and foreign currency options and forwards, if necessary. The Company records foreign currency derivatives at fair value, with fluctuations in the fair value being included in the statements of income as a component of other income. There were two outstanding foreign currency options and forwards related to receivables and payables hedging outstanding as of September 30, 2011. The fair value of the derivative liability and the gains and losses reported in the statements of income were not significant.

As of September 30, 2011, the Company's outstanding hedging contracts were scheduled to expire over the next 15 months. The Company expects to reclassify the current loss positions of $2.1 million, net of tax, within the next 12 months from OCI into the statement of income. As of December 31, 2010 and September 30, 2011, the Company's foreign currency derivative portfolio resulted in the Company recognizing an asset of $6.7 million and $1.3 million, respectively, as a component of other current assets and a liability of $1.4 million and $5.4 million, respectively, as a component of other accrued expenses.