13. DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Policy

The Company is subject to market rate risks due to fluctuation of foreign currency exchange rates and interest rates. The Company manages these risks by using derivative financial instruments in accordance with established policies and procedures. The Company does not use derivative financial instruments for trading purposes. The credit risks associated with these instruments are not considered to be significant since the counterparties are financial institutions with high creditworthiness and the Company does not anticipate any such losses.

Foreign Currency Exchange Risks

The Company's foreign currency exposure relates primarily to its foreign currency denominated assets in its international operations. The Company entered into foreign exchange forward contracts and foreign currency option contracts (foreign exchange contracts) designated to mitigate its exposure to foreign currency exchange risks.

Interest Rate Risks

The Company is exposed to interest rate risks mainly inherent in its debt obligations with both fixed and variable rates. Debt obligations that are sensitive to interest rate changes are disclosed in Note 7. In order to hedge these risks, the Company uses interest rate swap contracts and cross-currency interest rate swap contracts to change the characteristics of its fixed and variable rate exposures.

Cash Flow Hedges

The accounting treatments of changes in the fair value of foreign exchange contracts and interest rate swap agreements depend on whether derivatives are designated as cash flow hedges. The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges are reported in accumulated other comprehensive income. As for foreign exchange contracts related to forecasted intercompany transactions, the amounts are subsequently reclassified into earnings when unrelated third party transactions occur. In the case of interest rate swaps, the amounts are reclassified into earnings when the related interest expense is recognized. The unrecognized net loss (net of tax) of approximately ¥ 585 million on derivatives included in accumulated other comprehensive income (loss) at March 31, 2011 will be reclassified into earnings within the next 12 months. The ineffective portion of changes in the fair value of derivatives is immediately recorded in earnings.

Derivatives Not Designated as Hedging Instruments

The Company uses derivatives not designated as cash flow hedges in certain relationships, such as a part of foreign exchange contracts, interest rate swap contracts, and cross-currency interest rate swap contracts, for economic purposes. Changes in the fair value of derivatives not designated are reported in earnings immediately.

Fair Values of Derivative Instruments


(¥ in millions)
	Other current assets				Other current liabilities				Other long-term liabilities
At March 31:	2011		2010		2011		2010		2011		2010
Derivatives designated as hedging instruments:
Foreign exchange contracts	¥	3	¥	14	¥	—	¥	—	¥	—	¥	—
Interest rate swap contracts		—		—		908		1,688		332		704
Cross-currency interest rate swap contracts		—		—		288		41		72		52

Total derivatives designated as hedging instruments	¥	3	¥	14	¥	1,196	¥	1,729	¥	404	¥	756

Derivatives not designated as hedging instruments:
Foreign exchange contracts	¥	—	¥	2	¥	982	¥	474	¥	—	¥	—
Interest rate swap contracts		—		—		110		230		15		142
Cross-currency interest rate swap contracts		—		—		1,158		1,032		1,021		1,491

Total derivatives not designated as hedging instruments	¥	—	¥	2	¥	2,250	¥	1,736	¥	1,036	¥	1,633

Total	¥	3	¥	16	¥	3,446	¥	3,465	¥	1,440	¥	2,389

Income Effect of Derivative Instruments


(¥ in millions)
	Gain (Loss) (before tax) Recognized in Other Comprehensive Income and Realized in Net Income
Derivative instruments in cash flow hedges	Effective Portion Recognized in OCI			Consolidated Statements of Income Line Item		Effective Portion Reclassified from Accumulated OCI to Net Income
For the year ended March 31, 2011:
Foreign exchange contracts	¥	2			Revenues	¥	13
Interest rate swap contracts		(943	)		Interest expense		(2,193	)
Cross-currency interest rate swap contracts		279			Interest expense		(142	)
					Foreign exchange gain (loss)-net		434

Total	¥	(662	)			¥	(1,888	)

For the year ended March 31, 2010:
Foreign exchange contracts	¥	356			Revenues	¥	203
Interest rate swap contracts		(1,495	)		Interest expense		(2,304	)
Cross-currency interest rate swap contracts		(171	)		Interest expense		(78	)

Total	¥	(1,310	)			¥	(2,179	)

For the three months ended March 31, 2009:
Foreign exchange contracts	¥	(139	)		Revenues	¥	563
Interest rate swap contracts		(1,637	)		Interest expense		(177	)

Total	¥	(1,776	)			¥	386


(¥ in millions)
	Gain (Loss) (before tax) Recognized in Net Income
Derivative instruments not designated as hedging instruments	Consolidated Statements of Income Line Item		Gain (Loss) Recognized in Net Income
For the year ended March 31, 2011:
Foreign exchange contracts		Foreign exchange gain (loss)—net	¥	2,659
Interest rate swap contracts		Other—net		32
Cross-currency interest rate swap contracts		Other—net		344

Total			¥	3,035
For the year ended March 31, 2010:
Foreign exchange contracts		Foreign exchange gain (loss)—net	¥	1,346
Interest rate swap contracts		Other—net		(175	)
Cross-currency interest rate swap contracts		Other—net		(2,525	)

Total			¥	(1,354	)

For the three months ended March 31, 2009:
Foreign exchange contracts		Foreign exchange gain (loss)—net	¥	(5,026	)
Interest rate swap contracts		Other—net		(340	)
Cross-currency interest rate swap contracts		Other—net		(209	)

Total			¥	(5,575	)

The amount of gain or loss related to the hedging ineffectiveness was not material for the year ended March 31, 2011,2010 and 2009.