DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
|6 Months Ended|
Jun. 29, 2019
|Derivative Instruments and Hedging Activities Disclosure [Abstract]|
|DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES||DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Summary of Derivative Financial Instruments
On April 24, 2019, the Company began entering into derivative contracts with external counterparties to hedge certain foreign currency transactions.
All of the Company's outstanding derivative financial instruments are foreign exchange forward contracts. Although derivatives meet the criteria for hedge accounting at the inception of the hedging relationship, a limited number of derivative contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes.
The notional amount of all outstanding derivative contracts was $326.7 million at June 2019, consisting primarily of contracts hedging exposures to the Mexican peso, euro, Canadian dollar, British pound, Swedish krona and Polish zloty. Derivative contracts have maturities up to 20 months.
The following table presents outstanding derivatives on an individual contract basis:
The Company records and presents the fair value of all of its derivative assets and liabilities in the Company's balance sheets on a gross basis, even though they are subject to master netting agreements. If the Company were to offset and record the asset and liability balances of its foreign exchange forward contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Company's balance sheets would be adjusted from the current gross presentation to the net amounts as detailed in the following table:
Derivatives are classified as current or noncurrent based on maturity dates, as follows:
Cash Flow Hedges
The Company uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, intercompany service fees and royalties. The effects of cash flows hedging included in the Company's statements of income and statements of comprehensive income are summarized as follows:
Derivative Contracts Not Designated as Hedges
The Company uses derivative contracts to manage foreign currency exchange risk on third-party accounts payable. These contracts are not designated as hedges and are recorded at fair
value in the Company's balance sheets. Changes in the fair values of these instruments are recognized directly in earnings. Gains or losses on these contracts largely offset the net transaction gains or losses on the related assets and liabilities.
Following is a summary of these derivatives included in the Company's statements of income:
Other Derivative Information
There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three or six months ended June 2019.
In connection with the Separation, VF transferred $11.6 million of unrecognized gains on foreign currency exchange contracts related to the Jeanswear business. These gains were deferred in accumulated OCI and are being reclassified to earnings as the Company recognizes the underlying transactions in revenue.At June 2019, accumulated OCI included $8.4 million of pre-tax net deferred gains for foreign currency exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on exchange rates in effect when outstanding derivative contracts are settled.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef