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The methods and assumptions used in estimating the fair value of the Company's financial instruments are as follows:
- The derivative financial instruments, which consist of foreign exchange contracts, have been marked-to-market and are categorized as Level 2 in the fair value hierarchy. Factors included in the determination of fair value include the spot rate, forward rates, estimates of volatility, present value factor, strike prices, credit risk of the Company and credit risk of counterparties. As at December 29, 2012, a $147 unrealized loss (December 24, 2011 - $4 unrealized gain) was recorded in SG&A for the foreign exchange contracts outstanding.- The fair value of cash is determined using Level 2 inputs in the fair value hierarchy which include interest rates for similar instruments which are obtained from independent publications and market exchanges.- Given their short-term maturity, the fair value of cash, accounts receivable, payables and accruals and sales return provision approximates their carrying values.
(b) Financial instrument risk management
Exposure to foreign currency risk, interest rate risk, equity price risk, liquidity risk and credit risk arise in the normal course of the Company's business and are discussed further below:
Foreign Currency Risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. The Company purchases a significant portion of its leather and finished goods inventory from foreign vendors with payment terms in U.S. dollars. The Company uses a combination of foreign exchange contracts and spot purchases to manage its foreign exchange exposure on cash flows related to these purchases. A foreign exchange contract represents an option with a counterparty to buy or sell a foreign currency to meet its obligations. Credit risk exists in the event of a failure by a counterparty to fulfill its obligations. The Company reduces this risk by mainly dealing with highly-rated counterparties such as major Canadian financial institutions.
During the 13 week and 26 week periods ended December 29, 2012 and December 24, 2011, the Company entered into foreign exchange contracts with Canadian financial institutions as counterparties with U.S. dollar notional amounts as listed below. Foreign exchange contracts outstanding as at December 29, 2012 expire at various times between January 4, 2013 and December 16, 2013 and the foreign exchange contracts that were outstanding as at December 24, 2011 expired between January 3, 2012 and March 16, 2012.
26 Weeks Ended ---------------------------------------------- December 29, 2012 December 24, 2011 ----------------------------------------------Notional amount outstanding at beginning of period (US$000) $ 21,000 $ 18,500 Notional amount of foreign exchange contracts entered into during the period (US$000) 15,500 4,000 Notional amount of foreign exchange contracts expired during the period (US$000) (19,000) (18,500) ----------------------------------------------Notional amount outstanding at end of period (US$000) $ 17,500 $ 4,000Fair value of foreign exchange contracts outstanding at end of period - gain/(loss) (C$000) $ (147) $ 4
