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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2012
Derivative Financial Instruments | 10. Derivative Financial Instruments ASC Topic 815, “Derivatives and Hedging” (“ASC Topic 815”) requires a company to recognize all of its derivative instruments as either assets or liabilities in the Consolidated Balance Sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency exchange rate risk. Forward contracts against various foreign currencies are entered into to manage the foreign currency exchange rate risk on forecasted revenues and expenses denominated in currencies other than the functional currency of the operating unit (cash flow hedge). Other forward exchange contracts against various foreign currencies are entered into to manage the foreign currency exchange rate risk associated with certain firm commitments denominated in currencies other than the functional currency of the operating unit (fair value hedge). In addition, the Company will enter into non-designated forward contracts against various foreign currencies to manage the foreign currency exchange rate risk on recognized nonfunctional currency monetary accounts (non-designated hedge). The Company records all derivative financial instruments at their fair value in its Consolidated Balance Sheet. Except for certain non-designated hedges discussed below, all derivative financial instruments that the Company holds are designated as cash flow hedges and are highly effective in offsetting movements in the underlying risks. Such arrangements typically have terms between 2 and 24 months, but may have longer terms depending on the underlying cash flows being hedged, typically related to the projects in our backlog. The Company may also use interest rate contracts to mitigate its exposure to changes in interest rates on anticipated long-term debt issuances. At September 30, 2012, the Company has determined that the fair value of its derivative financial instruments representing assets of $81 million and liabilities of $34 million (primarily currency related derivatives) are determined using level 2 inputs (inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy as the fair value is based on publicly available foreign exchange and interest rates at each financial reporting date. At September 30, 2012, the net fair value of the Company’s foreign currency forward contracts totaled a net asset of $47 million. At September 30, 2012, the Company did not have any interest rate swaps and its financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when the Company’s financial instruments are in net liability positions. We do not use derivative financial instruments for trading or speculative purposes. Cash Flow Hedging Strategy To protect against the volatility of forecasted foreign currency cash flows resulting from forecasted revenues and expenses, the Company has instituted a cash flow hedging program. The Company hedges portions of its forecasted revenues and expenses denominated in nonfunctional currencies with forward contracts. When the U.S. dollar strengthens against the foreign currencies, the decrease in present value of future foreign currency revenues and expenses is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is subject to a particular currency risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Other Comprehensive Income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “revenues” when the hedged transactions are cash flows associated with forecasted revenues). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), or hedge components excluded from the assessment of effectiveness, is recognized in the Consolidated Statements of Income during the current period. The Company had the following outstanding foreign currency forward contracts that were entered into to hedge nonfunctional currency cash flows from forecasted revenues and expenses (in millions):
|  | Currency Denomination |
Foreign Currency |  | September 30, 2012 |  |  | December 31, 2011 |
Norwegian Krone |  | NOK | 7,035 |  |  | NOK | 6,639 |
U.S. Dollar |  | $ | 393 |  |  | $ | 402 |
Euro |  | € | 383 |  |  | € | 456 |
Mexican Peso |  | MXN | 102 |  |  | MXN | — |
Danish Krone |  | DKK | 112 |  |  | DKK | 98 |
Singapore Dollar |  | SGD | 16 |  |  | SGD | 10 |
British Pound Sterling |  | £ | 11 |  |  | £ | 2 |
Non-designated Hedging Strategy The Company enters into forward exchange contracts to hedge certain nonfunctional currency monetary accounts. The purpose of the Company’s foreign currency hedging activities is to protect the Company from risk that the eventual U.S. dollar equivalent cash flows from the nonfunctional currency monetary accounts will be adversely affected by changes in the exchange rates. For derivative instruments that are non-designated, the gain or loss on the derivative instrument subject to the hedged risk (i.e., nonfunctional currency monetary accounts) is recognized in other income (expense), net in current earnings. The Company had the following outstanding foreign currency forward contracts that hedge the fair value of nonfunctional currency monetary accounts (in millions):
|  | Currency Denomination |
Foreign Currency |  | September 30, 2012 |  |  | December 31, 2011 |
Norwegian Krone |  | NOK | 1,717 |  |  | NOK | 2,310 |
Russian Ruble |  | RUB | 1,266 |  |  | RUB | 786 |
U.S. Dollar |  | $ | 936 |  |  | $ | 483 |
Euro |  | € | 253 |  |  | € | 161 |
Danish Krone |  | DKK | 217 |  |  | DKK | 67 |
Brazilian Real |  | BRL | 99 |  |  | BRL | — |
Singapore Dollar |  | SGD | 43 |  |  | SGD | 5 |
British Pound Sterling |  | £ | 12 |  |  | £ | 9 |
Canadian Dollar |  | CAD | 2 |  |  | CAD | — |
Swedish Krone |  | SEK | — |  |  | SEK | 4 |
The Company has the following fair values of its derivative instruments and their balance sheet classifications (in millions): NATIONAL OILWELL VARCO, INC. Fair Values of Derivative Instruments (In millions)
|  | Asset Derivatives |  |  | Liability Derivatives |
|  |  |  | Fair Value |  |  |  |  | Fair Value |
|  | Balance Sheet |  | September 30, |  |  | December 31, |  |  | Balance Sheet |  | September 30, |  |  | December 31, |
|  | Location |  | 2012 |  |  | 2011 |  |  | Location |  | 2012 |  |  | 2011 |
Derivatives designated as hedging instruments under ASC Topic 815 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Prepaid and other current assets |  | $ | 42 |  |  | $ | 16 |  |  | Accrued liabilities |  | $ | 16 |  |  | $ | 62 |
Foreign exchange contracts |  | Other Assets |  |  | 22 |  |  |  | 1 |  |  | Other Liabilities |  |  | 1 |  |  |  | 13 |
Total derivatives designated as hedging instruments under ASC Topic 815 |  |  |  | $ | 64 |  |  | $ | 17 |  |  |  |  | $ | 17 |  |  | $ | 75 |
Derivatives not designated as hedging instruments under ASC Topic 815 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | Prepaid and other current assets |  | $ | 17 |  |  | $ | 9 |  |  | Accrued liabilities |  | $ | 17 |  |  | $ | 21 |
Total derivatives not designated as hedging instruments under ASC Topic 815 |  |  |  | $ | 17 |  |  | $ | 9 |  |  |  |  | $ | 17 |  |  | $ | 21 |
Total derivatives |  |  |  | $ | 81 |  |  | $ | 26 |  |  |  |  | $ | 34 |  |  | $ | 96 |
The Effect of Derivative Instruments on the Consolidated Statements of Income ($ in millions)
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Location of Gain (Loss) |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Recognized in Income on |  | Amount of Gain (Loss) |
|  |  |  |  |  |  |  | Location of Gain (Loss) |  |  |  |  |  |  |  | Derivative (Ineffective |  | Recognized in Income on |
|  |  |  |  |  |  |  | Reclassified from |  | Amount of Gain (Loss) |  |  | Portion and Amount |  | Derivative (Ineffective |
Derivatives in ASC Topic 815 |  | Amount of Gain (Loss) |  |  | Accumulated OCI into |  | Reclassified from |  |  | Excluded from |  | Portion and Amount |
Cash Flow Hedging |  | Recognized in OCI on |  |  | Income |  | Accumulated OCI into |  |  | Effectiveness |  | Excluded from |
Relationships |  | Derivative (Effective Portion) (a) |  |  | (Effective Portion) |  | Income (Effective Portion) |  |  | Testing) |  | Effectiveness Testing) (b) |
|  | Nine Months Ended September 30, |  |  |  |  | Nine Months Ended September 30, |  |  |  |  | Nine Months Ended September 30, |
|  | 2012 |  |  | 2011 |  |  |  |  | 2012 |  |  | 2011 |  |  |  |  | 2012 |  |  | 2011 |
|  |  |  |  |  |  |  |  |  | Revenue |  |  | (9 | ) |  |  | 11 |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  |  | 69 |  |  |  | 6 |  |  | Cost of revenue |  |  | (22 | ) |  |  | 38 |  |  | Other income (expense), net |  |  | 5 |  |  |  | 11 |
Total |  |  | 69 |  |  |  | 6 |  |  |  |  |  | (31 | ) |  |  | 49 |  |  |  |  |  | 5 |  |  |  | 11 |
Derivatives Not Designated as |  | Location of Gain (Loss) |  | Amount of Gain (Loss) |
Hedging Instruments under |  | Recognized in Income |  | Recognized in Income on |
ASC Topic 815 |  | on Derivative |  | Derivative |
|  |  |  | Nine Months Ended September 30, |
|  |  |  | 2012 |  |  | 2011 |
Foreign exchange contracts |  | Other income (expense), net |  |  | 8 |  |  |  | 0 |
Total |  |  |  |  | 8 |  |  |  | 0 |
(a) | The Company expects that $11 million of the Accumulated Other Comprehensive Income (Loss) will be reclassified into earnings within the next twelve months with an offset by gains from the underlying transactions resulting in no impact to earnings or cash flow.
(b) | The amount of gain (loss) recognized in income represents $(1) million and $11 million related to the ineffective portion of the hedging relationships for the nine months ended September 30, 2012 and 2011, respectively, and $6 million and $13 million related to the amount excluded from the assessment of the hedge effectiveness for the nine months ended September 30, 2012 and 2011, respectively.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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