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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | 3 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Non-designated Hedges In connection with the Micro Focus Acquisition, in August 2022, we entered into certain derivative transactions to meet certain foreign currency obligations under UK cash confirmation requirements related to the purchase price of the Micro Focus Acquisition, mitigate the risk of foreign currency appreciation in the GBP denominated purchase price and mitigate the risk of foreign currency appreciation in the EUR denominated existing debt held by Micro Focus. We entered into the following derivatives: (i) three deal-contingent forward contracts, (ii) a non-contingent forward contract, and (iii) EUR/USD cross currency swaps. The deal-contingent forward contracts had an aggregate notional amount of £1.475 billion. The non-contingent forward contract had a notional amount of £350 million. The cross currency swaps are comprised of 5-year EUR/USD cross currency swaps with a notional amount of €690 million and 7-year EUR/USD cross currency swaps with a notional amount of €690 million. These instruments were entered into as economic hedges to mitigate foreign currency risks associated with the Micro Focus Acquisition. The instruments did not initially qualify for hedge accounting at the time they were entered into. In connection with the closing of the Micro Focus Acquisition, the deal-contingent forward and non-deal contingent forward contracts were settled and we designated the 7-year EUR/USD cross currency swaps as net investment hedges (see further details below). The 5-year EUR/USD cross currency swaps are non-designated and are measured at fair value with changes to fair value being recognized in the Condensed Consolidated Statements of Income within “Other income (expense), net.” Net Investment Hedge During the third quarter of Fiscal 2023, the Company designated the €690 million of 7-year EUR/USD cross currency swaps as net investment hedges in accordance with “Derivatives and Hedging” (Topic 815). The Company utilizes the designated cross currency swaps to protect our EUR-denominated operations against exchange rate fluctuations. The Company assesses the hedge effectiveness of its net investment hedges on a quarterly basis utilizing a method based on the changes in spot price. As such, for derivative instruments designated as net investment hedges, changes in fair value of the designated hedging instruments attributable to fluctuations in the foreign currency spot exchange rates are initially recorded as a component of currency translation adjustments included within Condensed Consolidated Statements of Comprehensive Income until the hedged foreign operations are either sold or substantially liquidated. In accordance with Topic 815 certain components of the designated cross currency swaps relating to counterparty credit risk and forward exchange rates were excluded from the above effectiveness assessment. The fair value of these excluded components will be amortized over the life of the hedging instruments within “Interest and other related expense, net” within the Condensed Consolidated Statements of Income. Additionally, we will record the cash flows related to the periodic interest settlements on the 5-year EUR/USD cross currency swaps within the investing activities section of the Condensed Consolidated Statements of Cash Flows. Any gains or losses recognized upon settlement of the cross currency swaps will be recorded within the investing activities section of the Condensed Consolidated Statements of Cash Flows. Cash Flow Hedge We are engaged in hedging programs with various banks to limit the potential foreign exchange fluctuations incurred on future cash flows relating to a portion of our Canadian dollar payroll expenses. We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our business, in particular to changes in the Canadian dollar on account of large costs that are incurred from our centralized Canadian operations, which are denominated in Canadian dollars. As part of our risk management strategy, we use foreign currency forward contracts to hedge portions of our payroll exposure with typical maturities of between one and twelve months. We do not use foreign currency forward contracts for speculative purposes. We have designated these transactions as cash flow hedges of forecasted transactions under Topic 815. As the critical terms of the hedging instrument and of the entire hedged forecasted transaction are the same, in accordance with Topic 815, we have been able to conclude that changes in fair value or cash flows attributable to the risk being hedged are expected to completely offset at inception and on an ongoing basis. Accordingly, quarterly unrealized gains or losses on the effective portion of these forward contracts have been included within “Other Comprehensive Income (Loss) - net.” The fair value of the contracts as of September 30, 2023, is recorded within “Accounts payable and accrued liabilities” and represents the net loss before tax effect that is expected to be reclassified from accumulated other comprehensive income (loss) into earnings with the next twelve months. As of September 30, 2023, the notional amount of forward contracts we held to sell U.S. dollars in exchange for Canadian dollars was $96.5 million (June 30, 2023—$96.3 million). Fair Value of Derivative Instruments and Effect of Derivative Instruments on Financial Performance The fair values of outstanding derivative instruments are as follows:
|  |  | As of September 30, 2023 |  | As of June 30, 2023
Instrument |  | Balance Sheet Location | Asset |  | Liability |  | Asset |  | Liability
Derivatives designated as hedges: |  |  |  |  |  |  |  |  |
Cash flow hedge |  | Prepaid expenses and other current assets (Accounts payable and accrued liabilities) | $ | — |  |  | $ | (963) |  |  | $ | 1,530 |  |  | $ | — |
Net investment hedge |  | Prepaid expenses and other current assets (Accounts payable and accrued liabilities) | 304 |  |  | (70,748) |  |  | 596 |  |  | (87,855) |
Total derivatives designated as hedges |  |  | 304 |  |  | (71,711) |  |  | 2,126 |  |  | (87,855) |
Derivatives not designated as hedges: |  |  |  |  |  |  |  |  |
Cross currency swap contracts |  | Prepaid expenses and other current assets (Accounts payable and accrued liabilities) | 627 |  |  | (55,441) |  |  | 1,421 |  |  | (73,336) |
Total derivatives not designated as hedges |  |  | 627 |  |  | (55,441) |  |  | 1,421 |  |  | (73,336) |
Total derivatives |  |  | $ | 931 |  |  | $ | (127,152) |  |  | $ | 3,547 |  |  | $ | (161,191) |
The effects of gains (losses) from derivative instruments on our Condensed Consolidated Statements of Income is as follows:
|  |  |  | Three Months Ended September 30,
Instrument |  | Income Statement Location |  | 2023 |  | 2022
Derivatives designated as hedges: |  |  |  |  |  |
Cash flow hedge |  | Operating expenses |  | $ | (12) |  |  | $ | (800) |
Net investment hedge |  | Interest and other related expense, net |  | 922 |  |  | — |
Derivatives not designated as hedges: |  |  |  |  |  |
Deal-contingent forward contract |  | Other income (expense), net |  | — |  |  | (125,331) |
Non-contingent forward contract |  | Other income (expense), net |  | — |  |  | (26,203) |
Cross currency swap contracts |  | Other income (expense), net |  | 17,895 |  |  | (29,927) |
Cross currency swap contracts |  | Interest and other related expense, net |  | 856 |  |  | — |
Total |  |  |  | $ | 19,661 |  |  | $ | (182,261) |
The effects of the cash flow and net investment hedges on our Condensed Consolidated Statements of Comprehensive Income:
|  |  | Three Months Ended September 30,
| Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income Location |  | 2023 |  | 2022
Gain (loss) recognized in OCI (loss) on cash flow hedge (effective portion) | Unrealized gain (loss) on cash flow hedge |  | $ | (2,505) |  |  | $ | (4,546) |
Gain (loss) recognized in OCI (loss) on net investment hedge (effective portion) | Net foreign currency translation adjustment |  | $ | 17,107 |  |  | $ | — |
Gain (loss) reclassified from AOCI into income (effective portion) - cash flow hedge | Operating expenses |  | $ | (12) |  |  | $ | (800) |
Gain (loss) reclassified from AOCI into income (excluded from effectiveness testing) - net investment hedge | Interest and other related expense, net |  | $ | 561 |  |  | $ | — |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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