Derivative instruments and hedging activities

12 Months Ended

Mar. 31, 2012

Derivative instruments and hedging activities

14. Derivative instruments and hedging activities

Sony has certain financial instruments including financial assets and liabilities acquired in the normal course of business. Such financial instruments are exposed to market risk arising from the changes of foreign currency exchange rates and interest rates. In applying a consistent risk management strategy for the purpose of reducing such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign currency option contracts, and interest rate swap agreements (including interest rate and currency swap agreements). Certain other derivative financial instruments are entered into in the Financial Services segment for asset-liability management (ALM) purposes. These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other currencies of major countries. These derivatives generally mature or expire within six months after the balance sheet date. Other than derivatives utilized in the Financial Services segment for ALM, Sony does not use derivative financial instruments for trading or speculative purposes. These derivative transactions utilized for ALM in the Financial Services segment are executed within a certain limit in accordance with an internal risk management policy.

Derivative financial instruments held by Sony are classified and accounted for as described below.

Fair value hedges

Both the derivatives designated as fair value hedges and the hedged items are reflected at fair value in the consolidated balance sheets. Changes in the fair value of the derivatives designated as fair value hedges as well as offsetting changes in the carrying value of the underlying hedged items are recognized in income. For the fiscal years ended March 31, 2010, 2011 and 2012, these fair value hedges were fully effective. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.

Cash flow hedges

Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income (“OCI”) and reclassified into earnings when the hedged transaction affects earnings. For the fiscal years ended March 31, 2010, 2011 and 2012, the ineffective portion of the hedging relationship is not significant. In addition, there were no amounts excluded from the assessment of hedge effectiveness for cash flow hedges.

Derivatives not designated as hedges

Changes in the fair value of derivatives not designated as hedges are recognized in income.

A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:

Foreign exchange forward contracts and foreign currency option contracts

Foreign exchange forward contracts and purchased and written foreign currency option contracts are utilized primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies. The majority of written foreign currency option contracts are a part of range forward contract arrangements and expire in the same month with the corresponding purchased foreign currency option contracts.

Sony also enters into foreign exchange forward contracts, which effectively fix the cash flows from foreign currency denominated debt. Accordingly, these derivatives have been designated as cash flow hedges.

Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses.

Foreign exchange forward contracts, foreign currency option contracts and currency swap agreements held by certain subsidiaries in the Financial Services segment are marked-to-market with changes in value recognized in financial service revenue.

Interest rate swap agreements (including interest rate and currency swap agreements)

Interest rate swap agreements are utilized primarily to lower funding costs, to diversify sources of funding and to limit Sony’s exposure associated with underlying debt instruments and available-for-sale debt securities resulting from adverse fluctuations in interest rates, foreign currency exchange rates and changes in fair values. Interest rate swap agreements entered into in the Financial Services segment are used for reducing the risk arising from the changes in the fair value of fixed rate available-for-sale debt securities. These derivatives are considered to be a hedge against changes in the fair value of available-for-sale debt securities in the Financial Services segment. Accordingly, these derivatives have been designated as fair value hedges.

Sony also enters into certain interest rate swap agreements for the purpose of reducing the risk arising from the changes in anticipated cash flows of variable rate debt and foreign currency denominated debt. These interest rate swap agreements, which effectively swap foreign currency denominated variable rate debt for functional currency denominated fixed rate debt, are considered to be a hedge against changes in the anticipated cash flows of Sony’s foreign denominated variable rate obligations. Accordingly, these derivatives have been designated as cash flow hedges.

Certain subsidiaries in the Financial Services segment have interest rate swap agreements as part of their ALM, which are marked-to-market with changes in value recognized in financial service revenue.

Any other interest rate swap agreements that do not qualify as hedges, which are used for reducing the risk arising from changes of variable rate debt, are marked-to-market with changes in value recognized in other income and expenses.

Other agreements

Certain subsidiaries in the Financial Services segment have credit default swap agreements, equity future contracts, other currency contracts and hybrid financial instruments as part of their ALM, which are marked-to-market with changes in value recognized in financial services revenue. The hybrid financial instruments, disclosed in Note 7 as debt securities, contain embedded derivatives that are not required to be bifurcated because the entire instruments are carried at fair value.

The estimated fair values of Sony’s outstanding derivative instruments are summarized as follows:

Derivatives designated as hedging instruments	Yen in millions
	Balance sheet location	Fair value				Balance sheet location	Fair value
		March 31					March 31
	Asset derivatives	2011		2012		Liability derivatives	2011		2012
Interest rate contracts	Prepaid expenses and other current assets		416		151	Current liabilities other		9,026		14,017
Interest rate contracts			—		—	Liabilities other		1,663		1,184
Foreign exchange contracts	Prepaid expenses and other current assets		—		7,558	Current liabilities other		67		15
			416		7,709			10,756		15,216
Derivatives not designated as hedging instruments	Yen in millions
	Balance sheet location	Fair value				Balance sheet location	Fair value
		March 31					March 31
	Asset derivatives	2011		2012		Liability derivatives	2011		2012
Interest rate contracts	Prepaid expenses and other current assets		314		5	Current liabilities other		3,630		4,390
Interest rate contracts			—		—	Liabilities other		—		—
Foreign exchange contracts	Prepaid expenses and other current assets		14,353		10,798	Current liabilities other		19,361		21,612
Foreign exchange contracts	Assets other		9		5			—		—
Credit contracts	Prepaid expenses and other current assets		18		1	Current liabilities other		12		—
			14,694		10,809			23,003		26,002
Total derivatives			15,110		18,518			33,759		41,218

Presented below are the effects of derivative instruments on the consolidated statements of income for the fiscal years ended March 31, 2010, 2011 and 2012 (yen in millions).

Derivatives under fair value hedging relationships	Location of gain or (loss) recognized in income on derivative	Amount of gain or (loss) recognized in income on derivative
		Fiscal year ended March 31
		2010			2011			2012
Interest rate contracts	Financial services revenue		(3,475	)		588			(2,998	)
Foreign exchange contracts	Foreign exchange gain or (loss), net		97			(18	)		(49	)
Total			(3,378	)		570			(3,047	)

Derivatives under cash flow hedging relationships	Yen in millions
	Fiscal year ended March 31, 2011
	Amount of gain or (loss) recognized in OCI on derivative			Gain or (loss) reclassified from accumulated OCI into income (effective portion)			Gain or (loss) recognized in income on derivative (ineffective portion)
	Amount			Location	Amount		Location	Amount
Interest rate contracts		(108	)	Interest expense		329	Interest expense		—
Total		(108	)	Total		329	Total		—
Derivatives under cash flow hedging relationships	Yen in millions
	Fiscal year ended March 31, 2012
	Amount of gain or (loss) recognized in OCI on derivative			Gain or (loss) reclassified from accumulated OCI into income (effective portion)			Gain or (loss) recognized in income on derivative (ineffective portion)
	Amount			Location	Amount		Location	Amount
Interest rate contracts		171		Interest expense		308	Interest expense		—
Total		171		Total		308	Total		—

At March 31, 2012, amounts related to derivatives qualifying as cash flow hedges amounted to a net reduction of equity of 1,050 million yen.

Derivatives not designated as hedging instruments	Location of gain or (loss) recognized in income on derivative	Amount of gain or (loss) recognized in income on derivative (Yen in millions)
		Fiscal year ended March 31
		2010			2011			2012
Interest rate contracts	Financial services revenue		(884	)		(3,332	)		(3,303	)
Interest rate contracts	Financial services expenses		32			32			—
Foreign exchange contracts	Financial services revenue		1,468			(1,294	)		(79	)
Foreign exchange contracts	Foreign exchange gain or (loss), net		(8,779	)		8,311			4,324
Equity contracts	Financial services revenue		83			—			—
Bond contracts	Financial services revenue		68			44			—
Credit contracts	Financial services revenue		(518	)		(101	)		(25	)
Total			(8,530	)		3,660			917

The following table summarizes additional information, including notional amounts, for each type of derivative:

	Yen in millions
	March 31, 2011					March 31, 2012
	Notional amount		Fair value			Notional amount		Fair value
Foreign exchange contracts:
Foreign exchange forward contracts		1,364,147		(8,825	)		1,227,889		(7,305	)
Currency option contracts purchased		5,822		19			9,878		91
Currency option contracts written		423		(9	)		152		(1	)
Currency swap agreements		117,028		2,015			519,041		2,206
Other currency contracts		46,201		1,734			48,347		1,743
Interest rate contracts:
Interest rate swap agreements		448,353		(13,589	)		451,416		(19,435	)
Credit contracts:
Credit default swap agreements		4,841		6			1,367		1