Derivative Financial Instruments

3 Months Ended

Mar. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

8. Derivative Financial Instruments

The Company’s Korean subsidiary, MagnaChip Semiconductor, Ltd., entered into zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.

Details of derivative contracts as of March 31, 2014 are as follows:

Date of transaction	Type of derivative	Total notional amount		Month of settlement
March 8, 2013	Zero cost collar	$	54,000	April to June 2014
April 5, 2013	Zero cost collar	$	54,000	July to September 2014
May 29, 2013	Zero cost collar	$	54,000	October to December 2014
March 12, 2014	Zero cost collar	$	54,000	January to March 2015

The zero cost collar contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” (“ASC 815”), since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contracts. The Company is utilizing the “hypothetical derivative” method to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the “hypothetical derivative.”

The fair values of the Company’s outstanding zero cost collar contracts recorded as assets as of March 31, 2014 and December 31, 2013 are as follows:

Derivatives designated as hedging instruments:		March 31, 2014		December 31, 2013
Asset Derivatives:
Zero cost collars	Other current assets	$	3,191	$	4,912
Liabilities Derivatives:
Zero cost collars	Other current liabilities	$	169	$	—

Offsetting of derivative assets as of March 31, 2014 and December 31, 2013 is as follows:

As of March 31, 2014	Gross amounts of recognized assets/liabilities		Gross amounts offset in the balance sheets		Net amounts of assets/liabilities presented in the balance sheets		Gross amounts not offset in the balance sheets					Net amount
							Financial instruments			Cash collateral received/ pledged
Asset Derivatives:
Zero cost collars	$	3,191	$	—	$	3,191	$	(169	)	$	—	$	3,022
Liability Derivatives:
Zero cost collars	$	169	$	—	$	169	$	(169	)	$	—	$	—
As of December 31, 2013	Gross amounts of recognized assets/liabilities		Gross amounts offset in the balance sheets		Net amounts of assets/liabilities presented in the balance sheets		Gross amounts not offset in the balance sheets					Net amount
							Financial instruments			Cash collateral received/ pledged
Asset Derivatives:
Zero cost collars	$	4,912	$	—	$	4,912	$	—		$	—	$	4,912

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the three months ended March 31, 2014 and 2013:

Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)						Location of Gain (Loss) Reclassified from AOCI into Statement of Operations (Effective Portion)	Amount of Gain (Loss) Reclassified from AOCI into Statement of Operations (Effective Portion)					Location of Gain (Loss) Recognized in Statement of Operations on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Three Months Ended March 31,							Three Months Ended March 31,						Three Months Ended March 31,
	2014			2013 (As Restated)				2014			2013 (As Restated)			2014			2013 (As Restated)
Zero cost collars	$	(1,801	)	$	(5,482	)	Net sales	$	(3	)	$	250	Other income (expenses) —Others	$	(16	)	$	(214	)
Total	$	(1,801	)	$	(5,482	)		$	(3	)	$	250		$	(16	)	$	(214	)

As of March 31, 2014, the amount expected to be reclassified from accumulated other comprehensive income into earnings within the next twelve months is $2,912 thousand.

The Company’s zero cost collar contracts are subject to termination upon the occurrence of the following events:

(i) On the last day of a fiscal quarter, the sum of qualified and unrestricted cash and cash equivalents held by the Company is less than $30 million.

(ii) The rating of the Company’s debt is B- or lower by Standard & Poor’s Ratings Group or any successor rating agency thereof (“S&P”) or B3 or lower by Moody’s Investor Services, Inc. or any successor rating agency thereof (“Moody’s”) or the Company’s debt ceases to be assigned a rating by either S&P or Moody’s. See “Note 18. Subsequent Events” – Early termination of derivative contracts.

In addition, the Company is required to deposit cash collateral with three financial institutions, the counterparties to the zero cost collar contracts, for any exposure in excess of $5 million for each financial institution. No cash collateral was required as of March 31, 2014.