Note T — Derivative Financial Instruments and Hedging Activities

Summary of Derivative Financial Instruments

All of VF’s outstanding derivative financial instruments are forward foreign currency exchange 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 amounts of outstanding derivative contracts were $2.4 billion at December 2015 and $1.9 billion at December 2014, consisting primarily of contracts hedging exposures to the euro, British pound, Canadian dollar, Swiss franc, Mexican peso, Japanese yen, Polish zloty and Swedish krona. Derivative contracts have maturities up to 24 months.

 

The following table presents outstanding derivatives on an individual contract basis:

 

		Fair Value of Derivatives with Unrealized Gains								Fair Value of Derivatives with Unrealized Losses
		December 2015				December 2014				December 2015				December 2014
		In thousands
Foreign currency exchange contracts designated as hedging instruments		$	105,536			$	104,860			$	(27,896	)		$	(31,711	)
Foreign currency exchange contracts not designated as hedging instruments			255				404				(136	)			(58	)
Total derivatives		$	105,791			$	105,264			$	(28,032	)		$	(31,769	)

VF records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a gross basis, even though they are subject to master netting agreements. However, if VF were to offset and record the asset and liability balances of its forward foreign currency exchange contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Consolidated Balance Sheets as of December 2015 and December 2014 would be adjusted from the current gross presentation to the net amounts as detailed in the following table:

 

		December 2015								December 2014
		Derivative Asset				Derivative Liability				Derivative Asset				Derivative Liability
		In thousands
Gross amounts presented in the Consolidated Balance Sheets		$	105,791			$	(28,032	)		$	105,264			$	(31,769	)
Gross amounts not offset in the Consolidated Balance Sheets			(22,213	)			22,213				(30,724	)			30,724
Net amounts		$	83,578			$	(5,819	)		$	74,540			$	(1,045	)

Derivatives are classified as current or noncurrent based on maturity dates, as follows:

 

		December 2015				December 2014
		In thousands
Other current assets		$	92,796			$	84,995
Accrued liabilities (Note I)			(25,776	)			(26,968	)
Other assets (Note G)			12,995				20,269
Other liabilities (Note K)			(2,256	)			(4,801	)

 

Cash Flow Hedges

VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs, operating costs and intercompany royalties. The effects of cash flow hedging included in VF’s Consolidated Statements of Income and Consolidated Statements of Comprehensive Income are summarized as follows:

 

Cash Flow Hedging Relationships		Gain (Loss) on Derivatives Recognized in OCI
		2015				2014				2013
		In thousands
Foreign currency exchange		$	89,993			$	88,387			$	(8,133	)

 

		Gain (Loss) Reclassified from Accumulated OCI into Income
Location of Gain (Loss)		2015				2014				2013
		In thousands
Net sales		$	(68,543	)		$	(18,071	)		$	12,917
Cost of goods sold			132,432				(8,756	)			4,208
Selling, general and administrative expenses			(1,885	)			—				—
Other income (expense), net			7,267				(1,189	)			(1,051	)
Interest expense			(4,295	)			(4,095	)			(3,905	)
Total		$	64,976			$	(32,111	)		$	12,169

Derivative Contracts Dedesignated as Hedges

Cash flow hedges of some forecasted sales to third parties have historically been dedesignated as hedges when the sales were recognized. At that time, hedge accounting was discontinued and the amount of unrealized hedging gain or loss was recognized in net sales. These derivatives remained outstanding as an economic hedge of foreign currency exposures associated with the ultimate collection of the related accounts receivable, during which time changes in the fair value of the derivative contracts were recognized directly in earnings. As discussed below in Derivative Contracts Not Designated as Hedges, VF now utilizes separate derivative contracts to manage foreign currency risk related to the balance sheet exposures. Accordingly, 2013 was the last year during which dedesignations were recognized related to these cash flow hedges. During 2013, VF recorded a net gain of $1.5 million in other income (expense), net, for derivatives dedesignated as hedging instruments.

 

Derivative Contracts Not Designated as Hedges

VF uses derivative contracts to manage foreign currency exchange risk on third-party accounts receivable and payable, as well as intercompany borrowings. These contracts are not designated as hedges, and are recorded at fair value in the Consolidated 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 VF’s Consolidated Statements of Income:

 

Derivatives Not Designated as Hedges		Location of Gain (Loss) on Derivatives Recognized in Income		Gain (Loss) on Derivatives Recognized in Income
				2015				2014				2013
				In thousands
Foreign currency exchange		Cost of goods sold		$	(4,179	)		$	—			$	—
Foreign currency exchange		Other income (expense), net			2,806				(707	)			(2,664	)
Total				$	(1,373	)		$	(707	)		$	(2,664	)

Other Derivative Information

There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during 2015, 2014 and 2013.

At December 2015, accumulated OCI included $88.6 million of pretax net deferred gains for foreign 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.

VF entered into interest rate swap derivative contracts in 2011 and 2003 to hedge the interest rate risk for issuance of long-term debt due in 2021 and 2033, respectively. In each case, the contracts were terminated concurrent with the issuance of the debt, and the realized gain or loss was deferred in accumulated OCI. The remaining pretax net deferred loss in accumulated OCI was $27.2 million at December 2015, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments. During 2015, 2014 and 2013, VF reclassified $4.3 million, $4.1 million and $3.9 million, respectively, of net deferred loss from accumulated OCI into interest expense, and expects to reclassify $4.5 million to interest expense during the next 12 months.