Derivative financial instruments

9 Months Ended

Jul. 04, 2015

Derivative financial instruments [Abstract]

Derivative financial instruments

(12) Derivative financial instruments

The Company uses derivative financial instruments to partially offset its market exposure to fluctuations in certain foreign currencies, principally the British Pound and the Euro, and does not enter into derivative contracts for speculative or trading purposes.

Derivative financial instruments designated as cash flow hedges

The Company documents at the inception of the transaction the relationship between the hedging instruments and the hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions.  The Company also documents its assessment, both at hedge inception and on an on-going basis, whether the derivative financial instruments that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity in other comprehensive income.  The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statement of income within “Other income and expense”.

Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for example, when foreign currency denominated financial liabilities are translated into their functional currencies).  The gain or loss relating to the effective portion of cross currency swaps which hedge the effects of changes in foreign exchange rates are recognized in the consolidated statement of income within “foreign exchange differences”.  When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the consolidated statement of income.

The company did not have any financial instruments designated as cash flow hedges at July 4, 2015 or June 28, 2014.

Derivative financial instruments not designated for hedging

The fair value of derivative financial instruments that do not meet the FASB authoritative guidance for hedge accounting are immediately recognized in the consolidated statement of income under “Other income and expense”.  The fair value of these derivatives are recorded under “Prepaid expenses and other current assets” for asset derivatives or “Accrued expenses and other current liabilities” for liability derivatives, in the consolidated balance sheet.

In the quarter ended April 4, 2015 the company entered into foreign currency forward contracts to hedge its exposure to future fluctuations in the exchange rate between the U.S. Dollar and the Euro.  These contracts were intended to partially hedge the U.S. Dollar equivalent cost of the company’s planned purchases of inventory denominated in Euros.  The total gross amount of the outstanding forward contracts was $2,009,000 at July 4, 2015 ($0 at September 30, 2014).  These agreements were recorded at fair value in the consolidated balance sheet, resulting in a net gain of $132,000 and a net loss of $68,000 in the consolidated statement of income for the three and nine month periods, respectively, ended July 4, 2015 ($0 net  gain or loss for the three and nine month periods ended June 28, 2014).

The following table presents the fair values of the Company’s derivative financial instruments for the following periods:

	(in thousands of dollars)
	July 4, 2015				September 30, 2014
	Assets		Liabilities		Assets		Liabilities
Foreign currency contracts		-		68		-		-

The above liability derivative foreign currency contracts represent a Level 2 liability at July 4, 2015 in accordance with the fair value hierarchy described in Note 9.