Derivative Financial Instruments

12 Months Ended

Sep. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 13—Derivative Financial Instruments

The Company enters into foreign exchange forward derivative contracts to manage the variability in expected future cash flows attributable to changes in foreign exchange rates. At September 30, 2012, all derivative instruments outstanding mature within 12 months or less. The Company does not use foreign exchange forward contracts for speculative or trading purposes.

Cash Flow Hedges

The Company maintains a rolling hedge program with the objective of reducing exchange rate risk from forecasted net exposures of revenues derived from and payments made in foreign currencies during the following 12 months. The aggregate notional amounts of the Company's derivative contracts outstanding in its hedge program were $690 million and $651 million at September 30, 2012 and 2011, respectively. As of September 30, 2012, the Company’s cash flow hedges in an asset position totaled $12 million and were classified in prepaid expenses and other current assets on the consolidated balance sheet, while cash flow hedges in a liability position totaled $11 million and were classified in accrued liabilities on the consolidated balance sheet. See Note 4—Fair Value Measurements and Investments.

To qualify for cash flow hedge accounting treatment, the Company formally documents, at inception of the hedge, all relationships between hedging transactions and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also formally assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items and whether those derivatives may be expected to remain highly effective in future periods.

The Company uses regression analysis to assess effectiveness prospectively and retrospectively. The effectiveness tests are performed on the foreign exchange forward contracts based on changes in the spot rate of the derivative instrument compared to changes in the spot rate of the forecasted hedged transaction. Forward points are excluded for effectiveness testing and measurement purposes. The excluded forward points are reported in earnings. For fiscal 2012, 2011 and 2010, the amounts by which earnings were reduced relating to excluded forward points was $16 million, $20 million and $17 million, respectively.

The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded as a component of accumulated other comprehensive income (loss) on the consolidated balance sheets. When the forecasted transaction occurs and is recognized in earnings, the amount in accumulated other comprehensive income (loss) related to that hedge is reclassified to operating revenue or expense. The Company expects to reclassify $19 million pre-tax, to earnings during fiscal 2013.

In the event there is recognized ineffectiveness or the underlying forecasted transaction does not occur within the designated hedge period, or it becomes remote that the forecasted transaction will occur, the related gains and losses on the cash flow hedges are reclassified from accumulated other comprehensive income on the consolidated balance sheet to general and administrative expense on the consolidated statement of operations at that time. The amount of gain or loss recognized in earnings related to ineffectiveness was $1 million or less for each of fiscal 2012, 2011 and 2010.

Derivatives Not Designated as Hedging Instruments

Derivatives not designated as hedging instruments include foreign exchange forward contracts used to manage the impact of fluctuations in foreign currency exchange rates relative to recognized assets and liabilities denominated in non-functional currencies. As these derivatives are not designated in hedging relationships, related gains and losses are recorded directly in earnings as part of general and administrative expense. The Company recorded less than $1 million of gains related to these derivatives during fiscal 2012. At September 30, 2012, these derivative contracts had an aggregate notional amount of $49 million, and a fair value of $1 million, which was classified in prepaid expenses and other current assets on the consolidated balance sheet. See Note 4—Fair Value Measurements and Investments.

The Company's derivative financial instruments are subject to both credit and market risk. The Company monitors the credit-worthiness of the financial institutions that are counterparties to its derivative financial instruments and does not consider the risks of counterparty nonperformance to be significant. The Company mitigates this risk by entering into agreements which require each party to post collateral against its net liability position with the respective counterparty. As of September 30, 2012, the Company has posted and received collateral of $3 million and $4 million, respectively, with counterparties, which are included in prepaid and other current assets, and accrued liabilities, respectively, on the consolidated balance sheet. Notwithstanding the Company’s efforts to manage foreign exchange risk, there can be no absolute assurance that its hedging activities will adequately protect against the risks associated with foreign currency fluctuations. Credit and market risks related to derivative instruments were not considered significant at September 30, 2012.