DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

Oct. 28, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Instruments

As part of its risk management strategy, the Company uses derivative instruments, primarily foreign currency forward and option contracts and interest rate swaps, to hedge certain foreign currency and interest rate exposures.

The Company's objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge the exposures, thereby reducing volatility of earnings and protecting the fair values of assets and liabilities. For derivatives designated as cash flow hedges, the Company assesses hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative and recognizes any ineffective portion of the hedge in earnings as a component of interest and other, net. Hedge ineffectiveness recognized in earnings was not material during the three and nine months ended October 28, 2016 and October 30, 2015.

In connection with the EMC merger transaction, the Company acquired foreign exchange derivative instruments with a fair value of approximately $7.0 million as of the closing date of the transaction. The portfolio of instruments is comprised of foreign currency forward and option contracts that mature at various times within 12 months.  The Company elected to leave the acquired instruments undesignated from a hedge accounting perspective.

Foreign Exchange Risk

The Company uses foreign currency forward and option contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. Hedge accounting is applied based upon the criteria established by accounting guidance for derivative instruments and hedging activities. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is entered into until the time it is settled. The majority of these contracts typically expire in twelve months or less.

During the three and nine months ended October 28, 2016 and October 30, 2015, the Company did not discontinue any cash flow hedges related to foreign exchange contracts that had a material impact on the Company's results of operations due to the probability that the forecasted cash flows would not occur.

The Company uses forward contracts to hedge monetary assets and liabilities denominated in a foreign currency. These contracts generally expire in three months or less, are considered economic hedges, and are not designated for hedge accounting. The change in the fair value of these instruments represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates.

In connection with the expanded offerings of DFS in Europe, forward contracts are used to hedge financing receivables denominated in foreign currencies. These contracts are not designated for hedge accounting and most expire within three years or less.

Interest Rate Risk

The Company uses interest rate swaps to hedge the variability in cash flows related to the interest rate payments on structured financing debt. The interest rate swaps economically convert the variable rate on the structured financing debt to a fixed interest rate to match the underlying fixed rate being received on fixed-term customer leases and loans. These contracts are not designated for hedge accounting and most expire within three years or less.

Interest rate swaps are utilized to manage the interest rate risk, at a portfolio level, associated with DFS operations in Europe. The interest rate swaps economically convert the fixed rate on financing receivables to a three-month Euribor floating rate basis in order to match the floating rate nature of the banks' funding pool. These contracts are not designated for hedge accounting and most expire within three years or less.

Notional Amounts of Outstanding Derivative Instruments

The notional amounts of the Company's outstanding derivative instruments were as follows as of the dates indicated:

	October 28, 2016		January 29, 2016
	(in millions)
Foreign Exchange Contracts
Designated as cash flow hedging instruments	$	3,699	$	3,947
Non-designated as hedging instruments	3,016		985
Total	$	6,715	$	4,932
Interest Rate Contracts
Non-designated as hedging instruments	$	979	$	1,017

Effect of Derivative Instruments on the Consolidated Statements of Financial Position and the Consolidated Statements of Income (Loss)

Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in Accumulated OCI, Net of Tax, on Derivatives (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)	Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
(in millions)
For the three months ended October 28, 2016
				Total net revenue	$	23
Foreign exchange contracts	$	82		Total cost of net revenue	(6		)
Interest rate contracts	—			Interest and other, net	—			Interest and other, net	$	—
Total	$	82			$	17			$	—
For the three months ended October 30, 2015
				Total net revenue	$	25
Foreign exchange contracts	$	12		Total cost of net revenue	14
Interest rate contracts	—			Interest and other, net	—			Interest and other, net	$	—
Total	$	12			$	39			$	—
For the nine months ended October 28, 2016
				Total net revenue	$	(44	)
Foreign exchange contracts	$	(25	)	Total cost of net revenue	(20		)
Interest rate contracts	—			Interest and other, net	—			Interest and other, net	$	—
Total	$	(25	)		$	(64	)		$	—
For the nine months ended October 30, 2015
				Total net revenue	$	280
Foreign exchange contracts	$	72		Total cost of net revenue	32
Interest rate contracts	—			Interest and other, net	—			Interest and other, net	$	(1	)
Total	$	72			$	312			$	(1	)

Fair Value of Derivative Instruments in the Consolidated Statements of Financial Position

The Company presents its foreign exchange derivative instruments on a net basis in the Condensed Consolidated Statements of Financial Position due to the right of offset by its counterparties under master netting arrangements. The fair value of those derivative instruments presented on a gross basis as of each date indicated below was as follows:

	October 28, 2016
	Other Current Assets			Other Non- Current Assets		Other Current Liabilities			Other Non-Current Liabilities			Total Fair Value
				(in millions)
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position	$	123		$	—	$	10		$	—		$	133
Foreign exchange contracts in a liability position	(3		)	—		(1		)	—			(4		)
Net asset (liability)	120			—		9			—			129
Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position	260			8		83			—			351
Foreign exchange contracts in a liability position	(184		)	—		(109		)	—			(293		)
Interest rate contracts in an asset position	—			—		—			—			—
Interest rate contracts in a liability position	—			—		—			(1		)	(1		)
Net asset (liability)	76			8		(26		)	(1		)	57
Total derivatives at fair value	$	196		$	8	$	(17	)	$	(1	)	$	186
	January 29, 2016
	Other Current Assets			Other Non- Current Assets		Other Current Liabilities			Other Non-Current Liabilities			Total Fair Value
				(in millions)
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position	$	100		$	—	$	—		$	—		$	100
Foreign exchange contracts in a liability position	(11		)	—		—			—			(11		)
Net asset (liability)	89			—		—			—			89
Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position	301			1		—			—			302
Foreign exchange contracts in a liability position	(198		)	—		(5		)	(3		)	(206		)
Interest rate contracts in an asset position	—			2		—			—			2
Interest rate contracts in a liability position	—			—		—			(4		)	(4		)
Net asset (liability)	103			3		(5		)	(7		)	94
Total derivatives at fair value	$	192		$	3	$	(5	)	$	(7	)	$	183

The following table presents the gross amounts of the Company's derivative instruments, amounts offset due to master netting agreements with the Company's various counterparties, and the net amounts recognized in the Condensed Consolidated Statements of Financial Position.

	October 28, 2016
	Gross Amounts of Recognized Assets/ (Liabilities)			Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position			Gross Amounts not Offset in the Statement of Financial Position				Net Amount
										Financial Instruments		Cash Collateral Received or Pledged
	(in millions)
Derivative Instruments
Financial assets	$	484		$	(280	)	$	204		$	—	$	—	$	204
Financial liabilities	(298		)	280			(18		)	—		—		(18		)
Total Derivative Instruments	$	186		$	—		$	186		$	—	$	—	$	186
	January 29, 2016
	Gross Amounts of Recognized Assets/ (Liabilities)			Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position			Gross Amounts not Offset in the Statement of Financial Position				Net Amount
										Financial Instruments		Cash Collateral Received or Pledged
	(in millions)
Derivative Instruments
Financial assets	$	404		$	(209	)	$	195		$	—	$	—	$	195
Financial liabilities	(221		)	209			(12		)	—		—		(12		)
Total Derivative Instruments	$	183		$	—		$	183		$	—	$	—	$	183