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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | 6 Months Ended
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Feb. 28, 2018
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES [Abstract] |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | ﻿ NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ﻿ The Company is exposed to interest rate risk relating to its ongoing business operations. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements. ﻿ In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of three of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiaries entered into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements. ﻿ These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the entire gain or loss on the derivative reported as a component of other comprehensive income (loss). Amounts are deferred in other comprehensive income (loss) and reclassified into earnings in the same income statement line item that is used to present earnings effect of the hedged item when the hedged item affects earnings. ﻿ The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, including foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features. ﻿ Cash Flow Hedges ﻿ As of February 28, 2018, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting. ﻿ The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the six months ended February 28, 2018: ﻿ ﻿
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﻿Subsidiary |  | Date Entered into |  | Derivative Financial Counter- party |  | Derivative Financial Instruments |  | Initial US$ Notional Amount |  | Bank US$ loan Held with |  | Floating Leg (swap counter-party) |  | Fixed Rate for PSMT Subsidiary |  | Settlement Dates |  | Effective Period of swap
﻿PriceSmart, Inc (1) |  | 7-Nov-16 |  | MUFG Union Bank, N.A. ("Union Bank") |  | Interest rate swap |  | $ | 35,700,000 |  | Union Bank |  | Variable rate 1-month LIBOR plus 1.7% |  | 3.65 | % |  | 1st day of each month beginning on April 1, 2017 |  | March 1, 2017 - March 1, 2027
﻿Costa Rica |  | 28-Aug-15 |  | Citibank, N.A. ("Citi") |  | Cross currency interest rate swap |  | $ | 7,500,000 |  | Citibank, N.A. |  | Variable rate 3-month LIBOR plus 2.50% |  | 7.65 | % |  | 28th day of August, November, February, and May beginning on November 30, 2015 |  | August 28, 2015 - August 28, 2020
﻿Honduras (2) |  | 24-Mar-15 |  | Citibank, N.A. ("Citi") |  | Cross currency interest rate swap |  | $ | 8,500,000 |  | Citibank, N.A. |  | Variable rate 3-month LIBOR plus 3.25% |  | 10.75 | % |  | 24th day of March, June, September, and December beginning on June 24, 2015 |  | Refinanced on February 26,2018
﻿Honduras |  | 26-Feb-18 |  | Citibank, N.A. ("Citi") |  | Cross currency interest rate swap |  | $ | 13,500,000 |  | Citibank, N.A. |  | Variable rate 3-month LIBOR plus 3.00% |  | 9.75 | % |  | 29th day of May, August, November and February beginning on May 29, 2018 |  | February 26,2018 - February 24, 2023
﻿El Salvador |  | 16-Dec-14 |  | Bank of Nova Scotia ("Scotiabank") |  | Interest rate swap |  | $ | 4,000,000 |  | Bank of Nova Scotia |  | Variable rate 30-day LIBOR plus 3.5% |  | 4.78 | % |  | 29th day of each month beginning on December 29, 2014 |  | December 1, 2014 - August 29, 2019
﻿Colombia |  | 10-Dec-14 |  | Citibank, N.A. ("Citi") |  | Cross currency interest rate swap |  | $ | 15,000,000 |  | Citibank, N.A. |  | Variable rate 3-month LIBOR plus 2.8% |  | 8.25 | % |  | 4th day of March, June, Sept, Dec. beginning on March 4, 2015 |  | December 4, 2014 - December 3, 2019
﻿Panama |  | 9-Dec-14 |  | Bank of Nova Scotia ("Scotiabank") |  | Interest rate swap |  | $ | 10,000,000 |  | Bank of Nova Scotia |  | Variable rate 30-day LIBOR plus 3.5% |  | 5.16 | % |  | 28th day of each month beginning December 29, 2014 |  | November 28, 2014 - November 29, 2019
﻿Honduras |  | 23-Oct-14 |  | Citibank, N.A. ("Citi") |  | Cross currency interest rate swap |  | $ | 5,000,000 |  | Citibank, N.A. |  | Variable rate 3-month LIBOR plus 3.5% |  | 11.6 | % |  | 22nd day of January, April, July, and October beginning on January 22, 2015 |  | Settled on October 22, 2017
﻿Panama |  | 1-Aug-14 |  | Bank of Nova Scotia ("Scotiabank") |  | Interest rate swap |  | $ | 5,000,000 |  | Bank of Nova Scotia |  | Variable rate 30-day LIBOR plus 3.5% |  | 4.89 | % |  | 21st day of each month beginning on September 22, 2014 |  | August 21, 2014 - August 21, 2019
﻿Panama |  | 22-May-14 |  | Bank of Nova Scotia ("Scotiabank") |  | Interest rate swap |  | $ | 3,970,000 |  | Bank of Nova Scotia |  | Variable rate 30-day LIBOR plus 3.5% |  | 4.98 | % |  | 4th day of each month beginning on June 4, 2014 |  | May 5, 2014 - April 4, 2019
﻿
| (1) |  | The initial notional amount and fixed rate were modified effective January 2017.
| (2) |  | In February 2018, the Company’s Honduras subsidiary refinanced its portfolio of loans entered into with Citibank. The original notional amount of this portfolio of loans was $13.5 million, which the Company drew down in fiscal 2015. There was approximately $7.9 million of remaining principal at the time of the refinancing. Under the refinancing agreement, the portfolio of loans was combined into one loan and the notional amount of the loan increased back to the original $13.5 million, with the interest rate set at the 90 day LIBOR rate plus 3.0%. In conjunction with the refinancing of these loans, the Company’s Honduras subsidiary drew down the additional $5.6 million notional amount during February 2018. As part of the terms, the existing cash flow hedge related to the original loan, was de-designated and incorporated into a new hedging relationship where the Company’s Honduras subsidiary has entered into a cross-currency interest rate swap with Citibank. Under this new hedge agreement, the Company’s Honduras subsidiary will pay Honduras Lempiras, at a fixed interest rate of 9.75%.
For the three and six months ended February 28, 2018 and 201 7, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands): ﻿ ﻿
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﻿Income Statement Classification |  | Interest expense on borrowings(1) |  | Cost of swaps (2) |  | Total
﻿Interest expense for the three months ended February 28, 2018 |  | $ | 873 |  | $ | 176 |  | $ | 1,049
﻿Interest expense for the three months ended February 28, 2017 |  | $ | 755 |  | $ | 358 |  | $ | 1,113
﻿Interest expense for the six months ended February 28, 2018 |  | $ | 1,723 |  | $ | 497 |  | $ | 2,220
﻿Interest expense for the six months ended February 28, 2017 |  | $ | 1,504 |  | $ | 782 |  | $ | 2,286
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| (1) |  | This amount is representative of the interest expense recognized on the underlying hedged transactions.
| (2) |  | This amount is representative of the interest expense recognized on the cross-currency interest rate swaps designated as cash flow hedging instruments.
﻿ The total notional balance of the Company’s pay-fixed/receive-variable interest rate swaps and cross-currency interest rate swaps was as follows (in thousands): ﻿ ﻿
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﻿ |  | Notional Amount as of
﻿ |  | February 28, |  | August 31,
﻿ Floating Rate Payer (Swap Counterparty) |  | 2018 |  | 2017
﻿Union Bank |  | $ | 35,700 |  | $ | 35,700
﻿Citibank N.A. |  |  | 29,625 |  |  | 26,088
﻿Scotiabank |  |  | 12,124 |  |  | 13,724
﻿Total |  | $ | 77,449 |  | $ | 75,512
﻿ Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands): ﻿ ﻿
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﻿Derivatives designated as cash flow hedging instruments |  | Balance Sheet Location |  | Fair Value |  | Net Tax Effect |  | Net OCI |  | Fair Value |  | Net Tax Effect |  | Net OCI
﻿Cross-currency interest rate swaps |  | Other non-current assets |  | $ | 2,066 |  |  | (624) |  |  | 1,442 |  | $ | 2,547 |  | $ | (950) |  | $ | 1,597
﻿Interest rate swaps |  | Other non-current assets |  |  | 1,964 |  |  | (440) |  |  | 1,524 |  |  | — |  |  | — |  |  | —
﻿Interest rate swaps |  | Other long-term liabilities |  |  | — |  |  | — |  |  | — |  |  | (231) |  |  | 80 |  |  | (151)
﻿Cross-currency interest rate swaps |  | Other long-term liabilities |  |  | (670) |  |  | 201 |  |  | (469) |  |  | (451) |  |  | 135 |  |  | (316)
﻿Net fair value of derivatives designated as hedging instruments |  |  |  | $ | 3,360 |  | $ | (863) |  | $ | 2,497 |  | $ | 1,865 |  | $ | (735) |  | $ | 1,130
﻿ ﻿ Fair Value Instruments ﻿ From time to time the Company enters into non-deliverable forward foreign-exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. ﻿ ﻿ As of February 28, 2018 and August 31, 2017, the Company had no non-deliverable forward foreign-exchange contracts; therefore, no related assets or liabilities for either the notional value or the market value of such instruments were recorded on the consolidated balance sheet at February 28, 2018 or August 31, 2017. ﻿ For the three and six months ended February 28, 2018 and 2017, the Company included in its consolidated statements of income the forward derivative gain or (loss) on the non-deliverable forward foreign-exchange contracts as follows (in thousands): ﻿
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﻿ |  | Three Months Ended |  | Six Months Ended
﻿ |  | February 28, |  | February 28, |  | February 28, |  | February 28,
﻿Income Statement Classification |  | 2018 |  | 2017 |  | 2018 |  | 2017
﻿Other income (expense), net |  | $ | (27) |  | $ | 64 |  | $ | 66 |  | $ | 283
﻿

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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