Tricky Accounting, Need Help

[Will]

Ok, so I'm reading Nike's latest 10-k and I scroll down and see this:

As of May 31, 2004, $103.3 million of deferred net losses (net of tax)
on both outstanding and matured derivatives accumulated in other
comprehensive income are expected to be reclassified to net income
during the next twelve months as a result of underlying hedged
transactions also being recorded in net income. Actual amounts
ultimately reclassified to net income are dependent on the
exchange rates in effect when derivative contracts that are currently
outstanding mature. As of May 31, 2004, the maximum term over which the
Company is hedging exposures to the variability of cash flows for all
forecasted and recorded transactions is 18 months.

I'm not an accountant, but this seems wrong. $103.3 MILLION is
suddenly reclassified as gains instead of losses? Whaa?! I'm probably
missing something obvious. Any of you who read this and understand
hedging please take the time to explain the process. Specifically, is
it a normal business transaction to defer losses, hedge them, and then
report them as gains?

[Thomas Healy]

Post by Will
As of May 31, 2004, $103.3 million of deferred net losses (net of tax)
on both outstanding and matured derivatives accumulated in other
comprehensive income are expected to be reclassified to net income
during the next twelve months as a result of underlying hedged
transactions also being recorded in net income. Actual amounts
ultimately reclassified to net income are dependent on the
exchange rates in effect when derivative contracts that are currently
outstanding mature. As of May 31, 2004, the maximum term over which the
Company is hedging exposures to the variability of cash flows for all
forecasted and recorded transactions is 18 months.
I'm not an accountant, but this seems wrong. $103.3 MILLION is
suddenly reclassified as gains instead of losses? Whaa?! I'm probably
missing something obvious. Any of you who read this and understand
hedging please take the time to explain the process. Specifically, is
it a normal business transaction to defer losses, hedge them, and then
report them as gains?

" reclassified to net income" means that the losses will be recognized,
reducing net income. You're thinking of "revenues" which is a component of
net income, along with operating expenses and other items. The hedging gains
will offset derivative losses, hopefully netting to near zero if the finance
folks have done their job.