9. Derivative Financial Instruments

As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our financial position, results of operations, and cash flows. We use derivative instruments to hedge against these risks and only hold such instruments for hedging purposes, not for speculative or trading purposes.

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular balance sheet date. We report all of our derivative instruments at fair value and account for changes in the fair value of derivative instruments within “Accumulated other comprehensive loss” if the derivative instruments qualify for hedge accounting. For those derivative instruments that do not qualify for hedge accounting (“economic hedges”), we record the changes in fair value directly to earnings. See Note 10. “Fair Value Measurements” to our condensed consolidated financial statements for information about the techniques we use to measure the fair value of our derivative instruments.

The following tables present the fair values of derivative instruments included in our condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016 (in thousands):



	March 31, 2017
	Prepaid Expenses and Other Current Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	$	—	$	742	$	757
Total derivatives designated as hedging instruments	$	—	$	742	$	757

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	$	1,183	$	20,830	$	—
Interest rate swap contracts	—		—		4,676
Total derivatives not designated as hedging instruments	$	1,183	$	20,830	$	4,676
Total derivative instruments	$	1,183	$	21,572	$	5,433



	December 31, 2016
	Prepaid Expenses and Other Current Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	$	2,072	$	387	$	444
Total derivatives designated as hedging instruments	$	2,072	$	387	$	444

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	$	4,006	$	6,255	$	—
Total derivatives not designated as hedging instruments	$	4,006	$	6,255	$	—
Total derivative instruments	$	6,078	$	6,642	$	444

The impact of offsetting balances associated with derivative instruments designated as hedging instruments is shown below (in thousands):



	March 31, 2017
							Gross Amounts Not Offset in Consolidated Balance Sheet
	Gross Asset (Liability)			Gross Offset in Consolidated Balance Sheet	Net Amount Recognized in Financial Statements		Financial Instruments	Cash Collateral Pledged	Net Amount
Foreign exchange forward contracts	$	(1,499	)	—	(1,499	)	—	—	$	(1,499	)



	December 31, 2016
					Gross Amounts Not Offset in Consolidated Balance Sheet
	Gross Asset (Liability)		Gross Offset in Consolidated Balance Sheet	Net Amount Recognized in Financial Statements	Financial Instruments	Cash Collateral Pledged	Net Amount
Foreign exchange forward contracts	$	1,241	—	1,241	—	—	$	1,241

The following tables present the effective amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive income or loss and our condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016 (in thousands):



	Foreign Exchange Forward Contracts			Interest Rate Swap Contract			Cross Currency Swap Contract			Total
Balance in accumulated other comprehensive (loss) income at December 31, 2016	$	2,556		$	—		$	—		$	2,556
Amounts recognized in other comprehensive (loss) income	(2,967		)	—			—			(2,967		)
Balance in accumulated other comprehensive (loss) income at March 31, 2017	$	(411	)	$	—		$	—		$	(411	)

Balance in accumulated other comprehensive (loss) income at December 31, 2015	$	162		$	(16	)	$	(2,017	)	$	(1,871	)
Amounts recognized in other comprehensive income (loss)	(2		)	(2		)	7,163			7,159
Amounts reclassified to earnings impacting:
Foreign currency gain (loss), net	—			—			(7,162		)	(7,162		)
Interest expense, net	—			18			80			98
Balance in accumulated other comprehensive (loss) income at March 31, 2016	$	160		$	—		$	(1,936	)	$	(1,776	)

We recorded no amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the three months ended March 31, 2017 and 2016. We recognized unrealized losses of $0.1 million and $0.2 million related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within “Other income, net” during the three months ended March 31, 2017 and 2016.

The following table presents amounts related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the three months ended March 31, 2017 and 2016 (in thousands):




		Three Months Ended March 31,
	Income Statement Line Items	2017			2016
Foreign exchange forward contracts	Foreign currency gain (loss), net	$	(20,159	)	$	(17,381	)
Interest rate swap contracts	Interest expense, net	(4,676		)	—

Interest Rate Risk

We use cross-currency swap and interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments. We do not use such swap contracts for speculative or trading purposes.

In March 2017, Manildra Finco Pty Ltd, our indirect wholly-owned subsidiary and project financing company, entered into various interest rate swap contracts to hedge a portion of the floating rate construction loan facility under the associated project’s Manildra Credit Facility (as defined in Note 12. “Debt” to our condensed consolidated financial statements). Such swaps had an initial aggregate notional value of AUD 12.8 million and entitled the project to receive a one-month or three-month floating Bank Bill Swap or “BSBW” interest rate while requiring the project to pay a fixed rate of 3.13%. The aggregate notional amount of the interest rate swap contracts proportionately adjusts with the scheduled draws and principal payments on the underlying hedged debt. As of March 31, 2017, the aggregate notional value of the interest rate swap contracts was AUD 12.8 million ($9.8 million). These derivative instruments do not qualify for accounting as cash flow hedges in accordance with ASC 815 due to our expectation to sell the associated project before the maturity of its project specific debt financing and corresponding swap contracts. Accordingly, the changes in the fair value of the swap contracts are recorded directly to “Interest expense, net.”

In January 2017, FS Japan Project 12 GK, our indirect wholly-owned subsidiary and project company, entered into an interest rate swap contract to hedge a portion of the floating rate senior loan facility under the project’s Ishikawa Credit Agreement (as defined in Note 12. “Debt” to our condensed consolidated financial statements). Such swap had an initial notional value of ¥5.7 billion and entitled the project to receive a six-month floating Tokyo Interbank Offered Rate (“TIBOR”) interest rate while requiring the project to pay a fixed rate of 1.482%. The notional amount of the interest rate swap contract proportionately adjusts with the scheduled draws and principal payments on the underlying hedged debt. As of March 31, 2017, the notional value of the interest rate swap contract was ¥5.7 billion ($50.9 million). This derivative instrument does not qualify for accounting as a cash flow hedge in accordance with ASC 815 due to our expectation to sell the associated project before the maturity of its project specific debt financing and corresponding swap contract. Accordingly, the changes in the fair value of the swap contract are recorded directly to “Interest expense, net.”

Foreign Currency Exchange Risk

Cash Flow Exposure

We expect certain of our subsidiaries to have future cash flows that will be denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of March 31, 2017 and December 31, 2016, these foreign exchange forward contracts hedged our forecasted cash flows for 18 months and 21 months, respectively. These foreign exchange forward contracts qualify for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We initially report the effective portion of a derivative’s unrealized gain or loss in “Accumulated other comprehensive loss” and subsequently reclassify amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that these derivative financial instruments were highly effective as cash flow hedges as of March 31, 2017 and December 31, 2016.

As of March 31, 2017 and December 31, 2016, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were as follows (notional amounts and U.S. dollar equivalents in millions):



	March 31, 2017
Currency	Notional Amount	USD Equivalent
Indian rupee	INR 860.0	$13.2



	December 31, 2016
Currency	Notional Amount	USD Equivalent
Indian rupee	INR 860.0	$12.7
Australian dollar	AUD 55.3	$40.0

In the following 12 months, we expect to reclassify to earnings $0.3 million of net unrealized loss related to these forward contracts that are included in “Accumulated other comprehensive loss” at March 31, 2017 as we realize the earnings effect of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual exchange rates when we realize the related forecasted transactions.

Transaction Exposure and Economic Hedging

Many of our subsidiaries have assets and liabilities (primarily cash, receivables, marketable securities, payables, debt, and solar module collection and recycling liabilities) that are denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which these assets and liabilities are denominated will create fluctuations in our reported condensed consolidated statements of operations and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to economically hedge assets and liabilities against the effects of currency exchange rate fluctuations. The gains and losses on such foreign exchange forward contracts will economically offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency denominated assets and liabilities.

We enter into foreign exchange forward contracts to economically hedge balance sheet and other exposures related to transactions between certain of our subsidiaries and transactions with third parties. Such contracts are considered economic hedges and do not qualify for hedge accounting. Accordingly, we recognize gains or losses from the fluctuations in foreign exchange rates and the fair value of these derivative contracts in “Foreign currency gain (loss), net” on our condensed consolidated statements of operations. As of March 31, 2017 and December 31, 2016, the total net unrealized loss on our economic hedge foreign exchange forward contracts was $19.6 million and $2.2 million, respectively. These contracts mature at various dates within the next 1.8 years.

As of March 31, 2017 and December 31, 2016, the notional values of our foreign exchange forward contracts that do not qualify for hedge accounting were as follows (notional amounts and U.S. dollar equivalents in millions):



	March 31, 2017
Transaction	Currency	Notional Amount	USD Equivalent
Purchase	Euro	€103.8	$111.4
Sell	Euro	€138.8	$149.0
Purchase	Australian dollar	AUD 13.1	$10.0
Sell	Australian dollar	AUD 20.1	$15.4
Purchase	Malaysian ringgit	MYR 47.7	$10.8
Sell	Malaysian ringgit	MYR 184.6	$41.8
Sell	Canadian dollar	CAD 17.7	$13.3
Purchase	Chilean peso	CLP 11,113.1	$16.8
Sell	Chilean peso	CLP 20,305.7	$30.7
Purchase	Chinese yuan	CNY 32.3	$4.7
Sell	Japanese yen	¥20,307.9	$182.5
Sell	Singapore dollar	SGD 3.1	$2.2
Sell	Indian rupee	INR 13,565.1	$209.0
Sell	South African rand	ZAR 49.4	$3.8



	December 31, 2016
Transaction	Currency	Notional Amount	USD Equivalent
Purchase	Euro	€64.5	$68.0
Sell	Euro	€103.6	$109.3
Purchase	Australian dollar	AUD 1.2	$0.9
Sell	Australian dollar	AUD 19.3	$14.0
Sell	Malaysian ringgit	MYR 24.5	$5.5
Sell	Canadian dollar	CAD 17.7	$13.2
Sell	Chilean peso	CLP 13,611.6	$20.3
Purchase	Chinese yuan	CNY 24.3	$3.5
Purchase	Japanese yen	¥97.3	$0.8
Sell	Japanese yen	¥15,610.4	$133.7
Sell	British pound	£0.6	$0.7
Sell	Indian rupee	INR 12,753.2	$187.7
Sell	South African rand	ZAR 51.2	$3.7