To: Spekulatius who wrote ( 21059) 4/7/2005 10:27:18 PM From: Mark Marcellus Read Replies (1) | Respond to of 70865 I'm starting to look at WMT and one thing that really leaps out from their balance sheet is the negative working capital, which was negative $3 Billion as of January 31, 2004. Part of this can be attributed to their aggressive management of AP, and I'm sort of okay with that. However, Accrued Liabilities at $10 Billion and counting is also a huge piece of it, and I'm having trouble understanding the accounting. A small part of it is accrued membership fees, which is fine, but the bulk of it seems to be hedges. Here's how they describe it in the 2004 AR: The Company entered into cross-currency interest rate swaps to hedge the foreign currency risk of certain foreign-denominated debt. These swaps are designated as cash flow hedges of foreign currency exchange risk. The agreements are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. Changes in the foreign currency spot exchange rate result in reclassification of amounts from other accumulated comprehensive income to earnings to offset transaction gains or losses on foreigndenominated debt. These instruments mature in fiscal 2007 and 2009. The Company entered into an interest rate swap to lock in the interest rate on floating debt. Under the swap agreement, the Company pays a fixed interest rate and receives variable interest payments periodically over the life of the instrument. The notional, or contractual amount is used to measure interest to be paid or received and does not represent the exposure due to credit loss. As the specific terms and notional amounts of the derivative instruments exactly match those of the instruments being hedged, we have applied the “short-cut” method of accounting provided under FAS 133 and FAS 138. As such, the derivative instrument as assumed to be a perfect hedge and all changes in fair value of the hedges were recorded on the balance sheet in other comprehensive income The Company expects that the amount of gain or loss existing in other accumulated comprehensive income to be reclassified into earnings within the next 12 months will not be significant. Hedging instruments with a favorable fair value are classified as other assets and deferred charges in the Consolidated Balance Sheets Those instruments with an unfavorable fair value are classified as accrued liabilities. I'm confused. If this is treated as a "perfect hedge" and any gains and losses are handled in comprehensive income, shouldn't this be B/S neutral? Does the last paragraph mean that if a $1 Billion hedge has a fair value of one dollar it's a $1 Billion asset, but if it has a fair value of minus one dollar it's a $1 Billion liability? If that's true, it's insane. I've looked around and I can't find any source that even mentions the negative working capital issue. Maybe it's just me, but I'm having trouble understanding why this isn't at least worth an explanation, especially for a company whose net profit margins run around 3%. Any thoughts on this would be greatly appreciated.