ABB Annual Report 2012 PDF - ABB Group Annual Report 2012

Note 5Financial instruments, continuedFair value hedgesTo reduce its interest rate exposure arising primarily from its debt issuance activities, the Company uses interest rateswaps. Where such instruments are designated as fair value hedges, the changes in fair value of these instruments, aswell as the changes in fair value of the risk component of the underlying debt being hedged, are recorded as offsettinggains and losses in “Interest and other finance expense”. Hedge ineffectiveness of instruments designated as fair valuehedges in 2012, 2011 and 2010, was not significant.The effect of derivative instruments, designated and qualifying as fair value hedges, on the Consolidated IncomeStatements was as follows:2012Type of derivative designatedGains (losses) recognized in income on derivativesdesignated as fair value hedgesGains (losses) recognized in incomeon hedged itemas a fair value hedgeLocation ($ in millions) Location ($ in millions)Interest rate contracts Interest and other finance expense 6 Interest and other finance expense (6)2011Type of derivative designatedGains (losses) recognized in income on derivativesdesignated as fair value hedgesGains (losses) recognized in incomeon hedged itemas a fair value hedgeLocation ($ in millions) Location ($ in millions)Interest rate contracts Interest and other finance expense (24) Interest and other finance expense 242010Type of derivative designatedGains (losses) recognized in income on derivativesdesignated as fair value hedgesGains (losses) recognized in incomeon hedged itemas a fair value hedgeLocation ($ in millions) Location ($ in millions)Interest rate contracts Interest and other finance expense (12) Interest and other finance expense 12Derivatives not designatedin hedge relationshipsDerivative instruments that are not designated as hedges or do not qualify as either cash flow or fair value hedgesare economic hedges used for risk management purposes. Gains and losses from changes in the fair values of suchderivatives are recognized in the same line in the income statement as the economically hedged transaction.Furthermore, under certain circumstances, the Company is required to split and account separately for foreign currencyderivatives that are embedded within certain binding sales or purchase contracts denominated in a currency other thanthe functional currency of the subsidiary and the counterparty.The gains (losses) recognized in the Consolidated Income Statements on derivatives not designated in hedging relationshipsare included in the table below:(1)Type of derivative not designated as a hedgeGains (losses) recognized in income($ in millions) Location 2012 2011 2010Foreign exchange contracts Total revenues 318 (93) 436Total cost of sales (193) (25) (263)SG&A expenses (1) (3) – –Interest and other finance expense 68 265 563Embedded foreign exchange contracts Total revenues (148) (31) (279)Total cost of sales 28 11 17Commodity contracts Total cost of sales 10 (59) 38Interest and other finance expense 1 1 –Interest rate contracts Interest and other finance expense (1) – –Cash-settled call options Interest and other finance expense – (1) (1)Total 80 68 511SG&A expenses represent “Selling, general and administrative expenses”.98 Financial review | ABB Annual Report 2012