Financial Instruments

6 Months Ended

Feb. 29, 2012

Notes to Financial Statements [Abstract]

Note 10. Financial Instruments

The Company uses derivative instruments to manage its interest rate exposure associated with some of its fixed-rate borrowings. The Company does not use derivative instruments for trading or speculative purposes. All derivative instruments are recognized in the Consolidated Balance Sheets at fair value. The Company designates interest rate swaps as fair value hedges of fixed-rate borrowings. For derivatives designated as fair value hedges, the change in the fair value of both the derivative instrument and the hedged item are recognized in earnings in the current period. At the inception of a hedge transaction, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge. In addition, it assesses both at inception of the hedge and on an ongoing basis whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is recognized currently in earnings.

Counterparties to derivative financial instruments expose the Company to credit-related losses in the event of nonperformance, but the Company regularly monitors the creditworthiness of each counterparty.

Fair Value Hedges

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in interest expense on the Consolidated Statement of Earnings.

In January 2010, the Company terminated its existing one-month future LIBOR swaps that converted all of its $1.3 billion of its 4.875% fixed rate debt to floating. Upon termination, the Company received payment from its counterparty that consisted of accrued interest and an amount representing the fair value of the swaps. The related fair value benefit attributed to the Company’s debt continues to amortize over the life of the debt, which matures on August 1, 2013. The Company then entered into six-month LIBOR in arrears swaps with two counterparties for all of its $1.3 billion 4.875% fixed rate debt.

In May 2011, the Company entered into interest rate swaps with two counterparties converting $250 million of its 5.250% fixed rate notes to a floating interest rate based on the six-month LIBOR in arrears plus a constant spread. Subsequent to the quarter-end, in March 2012, the Company entered into interest rate swaps with the same two counterparties converting an additional $250 million of its 5.250% fixed rate notes to a floating interest rate based on the one-month LIBOR in arrears plus a constant spread. All swap termination dates coincides with the notes maturity date, January 15, 2019.

The notional amounts of derivative instruments outstanding as of February 29, 2012, August 31, 2011 and February 28, 2011 were as follows (In millions):

	February 29, 2012		August 31, 2011		February 28, 2011
Derivatives designated as hedges:
Interest rate swaps	$	1,550	$	1,550	$	1,300

The changes in fair value of the notes attributable to the hedged risk are included in long-term debt on the Consolidated Condensed Balance Sheets (see Note 8) and amortized through maturity. At February 29, 2012, August 31, 2011 and February 28, 2011, the Company had net unamortized fair value changes of $41 million, $57 million and $40 million, respectively.

The fair value and balance sheet presentation of derivative instruments at February 29, 2012, August 31, 2011 and February 28, 2011, were as follows (In millions):

	Location in Consolidated Condensed Balance Sheet	February 29, 2012		August 31, 2011		February 28, 2011
Asset derivatives designated as hedges:
Interest rate swaps	Other non-current assets	$	55	$	63	$	38

Gains and losses relating to the ineffectiveness of the Company’s derivative instruments are recorded in interest expense on the Consolidated Condensed Statement of Earnings. The amounts recorded for the quarter and six month periods ended February 29, 2012 were immaterial. The prior year’s expense was $2 million in the quarter and six month periods.