Derivative Instruments

3 Months Ended

Apr. 29, 2016

Derivative Instruments

Derivative Instruments

Note 11: Derivative Instruments - During the quarter, the Company entered into a definitive agreement to acquire all of the issued and outstanding common shares of RONA inc. (RONA). To manage the foreign currency exchange rate risk on the consideration to be paid for the RONA acquisition, the Company entered into an option to purchase 3.2 billion Canadian dollars expiring November 1, 2016. The premium paid for this option of $103 million is shown within cash flows from investing activities in the consolidated statements of cash flows.

This foreign exchange option contract is classified within other current assets in the consolidated balance sheet, and is carried at its fair value of $263 million at April 29, 2016. It is not accounted for as a hedging instrument, and gains and losses resulting from changes in fair value are included in SG&A expense in the consolidated statements of current and retained earnings. For the three months ended April 29, 2016, the Company recorded a net unrealized gain of $160 million. See Note 2 to the consolidated financial statements included herein for additional information regarding fair value of derivative instruments.

In May 2016, subsequent to the end of the first quarter, the option contract was settled for $179 million, representing a decrease of $84 million from its fair value recorded at April 29, 2016.  This decrease in value will be reflected as a loss in the second quarter and will offset the $160 million unrealized gain recorded in the first quarter, resulting in a total realized gain of $76 million on the foreign exchange option contract in fiscal 2016.