| Derivative financial instruments |
7. Derivative financial instruments
The Company is exposed to the risk of rate fluctuations on foreign currency assets and liabilities and on foreign currency denominated forecasted cash flows. The Company has established risk management policies, including the use of derivative financial instruments to hedge foreign currency assets and liabilities and foreign currency denominated forecasted cash flows and interest rate risks. These derivative financial instruments are largely deliverable and non-deliverable forward foreign exchange contracts and interest rate swaps. The Company enters into these contracts with counterparties that are banks or other financial institutions, and the Company considers the risk of non-performance by such counterparties not to be material. The forward foreign exchange contracts and interest rate swaps mature over periods of up to 60 months and the forecasted transactions are expected to occur during the same periods.
The following table presents the aggregate notional principal amounts of outstanding derivative financial instruments together with the related balance sheet exposure:
|
|
|
Notional principal amounts
(note a) |
|
|
Balance sheet exposure asset
(liability) (note b) |
|
|
|
|
As of
December 31,
2015 |
|
|
As of
December 31,
2016 |
|
|
As of
December 31,
2015 |
|
|
As of
December 31,
2016 |
|
|
Foreign exchange forward contracts denominated in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States dollars (sell) Indian rupees (buy) |
|
$ |
1,139,400 |
|
|
$ |
1,108,400 |
|
|
$ |
(48,197 |
) |
|
$ |
6,669 |
|
|
United States dollars (sell) Mexican peso (buy) |
|
|
8,520 |
|
|
|
9,120 |
|
|
|
(1,163 |
) |
|
|
(187 |
) |
|
United States dollars (sell) Philippines peso (buy) |
|
|
58,500 |
|
|
|
70,050 |
|
|
|
(1,387 |
) |
|
|
(1,036 |
) |
|
Euro (sell) United States dollars (buy) |
|
|
146,719 |
|
|
|
138,613 |
|
|
|
9,109 |
|
|
|
9,180 |
|
|
Euro (sell) Romanian leu (buy) |
|
|
39,027 |
|
|
|
29,805 |
|
|
|
567 |
|
|
|
(152 |
) |
|
Japanese yen (sell) Chinese renminbi (buy) |
|
|
62,740 |
|
|
|
77,267 |
|
|
|
(1,379 |
) |
|
|
(742 |
) |
|
Pound sterling (sell) United States dollars (buy) |
|
|
118,438 |
|
|
|
104,142 |
|
|
|
7,496 |
|
|
|
14,228 |
|
|
Australian dollars (sell) United States dollars (buy) |
|
|
106,544 |
|
|
|
114,412 |
|
|
|
5,714 |
|
|
|
2,328 |
|
|
Interest rate swaps (floating to fixed) |
|
|
— |
|
|
|
456,810 |
|
|
|
— |
|
|
|
7,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,240 |
) |
|
|
38,034 |
|
|
(a) |
Notional amounts are key elements of derivative financial instrument agreements but do not represent the amount exchanged by counterparties and do not measure the Company’s exposure to credit or market risks. However, the amounts exchanged are based on the notional amounts and other provisions of the underlying derivative financial instrument agreements. |
|
(b) |
Balance sheet exposure is denominated in U.S. dollars and denotes the mark-to-market impact of the derivative financial instruments on the reporting date. |
FASB guidance on derivatives and hedging requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the Balance Sheet. In accordance with the FASB guidance on derivatives and hedging, the Company designates foreign exchange forward contracts and interest rate swaps as cash flow
7. Derivative financial instruments (Continued)
hedges. Foreign exchange forward contracts are entered into to cover the effects of future exchange rate variability on forecasted revenue and purchases of services, and interest rate swaps are entered into to cover interest rate fluctuation risk. In addition to this program, the Company uses derivative instruments that are not accounted for as hedges under the FASB guidance in order to hedge foreign exchange risks related to balance sheet items, such as receivables and intercompany borrowings, that are denominated in currencies other than the Company’s underlying functional currency.
The fair value of the Company’s derivative instruments and their location in the Company’s financial statements are summarized in the table below:
|
|
|
Cash flow hedges |
|
|
Non-designated |
|
|
|
|
As of
December 31,
2015 |
|
|
As of
December 31,
2016 |
|
|
As of
December 31,
2015 |
|
|
As of
December 31,
2016 |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
17,400 |
|
|
$ |
33,921 |
|
|
$ |
884 |
|
|
$ |
809 |
|
|
Other assets |
|
$ |
12,096 |
|
|
$ |
20,657 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities |
|
$ |
34,576 |
|
|
$ |
4,540 |
|
|
$ |
34 |
|
|
$ |
237 |
|
|
Other liabilities |
|
$ |
25,010 |
|
|
$ |
12,576 |
|
|
$ |
— |
|
|
$ |
— |
|
Cash flow hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain (loss) on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is recognized in the consolidated statements of income. Gains (losses) on the derivatives, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in earnings as incurred.
In connection with cash flow hedges, the gains (losses) recorded as a component of other comprehensive income (loss), or OCI, and the related tax effects are summarized below:
|
|
|
Year ended December 31, |
|
|
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
|
|
|
Before-
tax
Amount |
|
|
Tax
(Expense)
or
Benefit |
|
|
Net of
tax
Amount |
|
|
Before-
tax
Amount |
|
|
Tax
(Expense)
or
Benefit |
|
|
Net of
tax
Amount |
|
|
Before-
tax
Amount |
|
|
Tax
(Expense)
or
Benefit |
|
|
Net of
tax
Amount |
|
|
Opening balance as of January 1 |
|
$ |
(205,952 |
) |
|
$ |
72,612 |
|
|
$ |
(133,340 |
) |
|
$ |
(66,786 |
) |
|
$ |
23,646 |
|
|
$ |
(43,140 |
) |
|
$ |
(30,090 |
) |
|
$ |
9,830 |
|
|
$ |
(20,260 |
) |
|
Net gains (losses) reclassified into
statement of income on completion of
hedged transactions |
|
|
(49,161 |
) |
|
|
17,498 |
|
|
|
(31,663 |
) |
|
|
(42,106 |
) |
|
|
15,346 |
|
|
|
(26,760 |
) |
|
|
(6,799 |
) |
|
|
409 |
|
|
|
(6,390 |
) |
|
Changes in fair value of effective portion of outstanding derivatives, net |
|
|
90,005 |
|
|
|
(31,468 |
) |
|
|
58,537 |
|
|
|
(5,410 |
) |
|
|
1,530 |
|
|
|
(3,880 |
) |
|
|
60,752 |
|
|
|
(23,400 |
) |
|
|
37,352 |
|
|
Gain (loss) on cash flow hedging
derivatives, net |
|
|
139,166 |
|
|
|
(48,966 |
) |
|
|
90,200 |
|
|
|
36,696 |
|
|
|
(13,816 |
) |
|
|
22,880 |
|
|
|
67,551 |
|
|
|
(23,809 |
) |
|
|
43,742 |
|
|
Closing balance as of December 31 |
|
$ |
(66,786 |
) |
|
$ |
23,646 |
|
|
$ |
(43,140 |
) |
|
$ |
(30,090 |
) |
|
$ |
9,830 |
|
|
$ |
(20,260 |
) |
|
$ |
37,461 |
|
|
$ |
(13,979 |
) |
|
$ |
23,482 |
|
7. Derivative financial instruments (Continued)
The gains or losses recognized in other comprehensive income (loss) and their effects on financial performance are summarized below:
|
Derivatives in Cash Flow
Hedging Relationships |
Amount of Gain (Loss)
recognized in OCI on
Derivatives (Effective
Portion) |
|
|
|
Location of Gain
(Loss)
reclassified from
OCI into
Statement of
Income
(Effective
Portion) |
|
Amount of Gain (Loss)
reclassified from OCI into
Statement of Income
(Effective Portion) |
|
|
|
Year ended December 31, |
|
|
|
|
|
Year ended December 31, |
|
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
|
|
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
|
Forward foreign exchange
contracts |
$ |
90,005 |
|
|
$ |
(5,410 |
) |
|
$ |
54,664 |
|
|
|
Revenue |
|
$ |
(4,301 |
) |
|
$ |
13,667 |
|
|
$ |
12,859 |
|
|
Interest rate swaps |
|
— |
|
|
|
— |
|
|
|
6,088 |
|
|
|
Cost of revenue |
|
|
(35,539 |
) |
|
|
(44,634 |
) |
|
|
(14,223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
expenses |
|
|
(9,321 |
) |
|
|
(11,139 |
) |
|
|
(3,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
— |
|
|
|
— |
|
|
|
(1,670 |
) |
|
|
$ |
90,005 |
|
|
$ |
(5,410 |
) |
|
$ |
60,752 |
|
|
|
|
|
$ |
(49,161 |
) |
|
$ |
(42,106 |
) |
|
$ |
(6,799 |
) |
Gain (loss) recognized in income on the ineffective portion of derivatives and the amount excluded from effectiveness testing is $0 as of December 31, 2014, 2015 and 2016.
Non-designated Hedges
|
Derivatives not designated as hedging
instruments |
|
Location of Gain (Loss) recognized in Statement of
Income on Derivatives |
|
Amount of Gain (Loss)
recognized in Statement of
Income on Derivatives |
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
|
Forward foreign exchange
contracts (Note a) |
|
Foreign exchange gains (losses), net |
|
$ |
287 |
|
|
$ |
6,566 |
|
|
$ |
2,921 |
|
|
|
|
|
|
$ |
287 |
|
|
$ |
6,566 |
|
|
$ |
2,921 |
|
|
(a) |
These forward foreign exchange contracts were entered into to hedge fluctuations in foreign exchange rates for recognized balance sheet items, such as receivables and intercompany borrowings, and were not originally designated as hedges under FASB guidance on derivatives and hedging. Realized gains (losses) and changes in the fair value of these derivatives are recorded in foreign exchange gains (losses), net in the consolidated statements of income. |
|