|MEDTRONIC PLC filed this Form 10-Q on 12/04/2017|
Notes to Consolidated Financial Statements
Fair Value Hedges
Interest rate derivative instruments designated as fair value hedges are designed to manage the exposure to interest rate movements and to reduce borrowing costs by converting fixed-rate debt into floating-rate debt. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
Changes in the fair value of the derivative instruments are recognized in interest expense, net, and are offset by changes in the fair value of the underlying debt instrument. The gains (losses) from terminated interest rate swap agreements are recognized in long-term debt, increasing (decreasing) the outstanding balances of the debt, and amortized as a reduction of (addition to) interest expense, net over the remaining life of the related debt. The cash flows from the termination of interest rate swap agreements are reported as operating activities in the consolidated statements of cash flows.
At both October 27, 2017 and April 28, 2017, the Company had interest rate swaps in gross notional amounts of $1.2 billion, designated as fair value hedges of underlying fixed-rate senior note obligations, including the Company's $500 million 4.125 percent 2011 Senior Notes due 2021 and the $675 million 3.125 percent 2012 Senior Notes due 2022.
At October 27, 2017 and April 28, 2017, the market value of outstanding interest rate swap agreements was an unrealized gain of $30 million and $41 million, respectively, and the market value of the hedged item was an unrealized loss of $30 million and $41 million, respectively. The amounts were recorded in other assets with the offsets recorded in long-term debt on the consolidated balance sheets.
No significant hedge ineffectiveness was recognized as a result of these fair value hedges for the three and six months ended October 27, 2017 and October 28, 2016. In addition, the Company did not recognize any gains or losses during the three and six months ended October 27, 2017 and October 28, 2016 on firm commitments that no longer qualify as fair value hedges.