7. Derivative Financial Instruments

The Company’s Korean subsidiary from time to time has entered into zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues.

Details of derivative contracts as of September 30, 2016 are as follows (in thousands):

 

Date of transaction

Type of derivative

Total notional amount

Month of settlement

August 3, 2016

Zero cost collar

$

30,000

October to December 2016

Details of derivative contracts as of December 31, 2015 are as follows (in thousands):

 

Date of transaction

Type of derivative

Total notional amount

Month of settlement

September 30, 2015

Zero cost collar

$

30,000

January to March 2016

September 30, 2015

Zero cost collar

$

30,000

April to June 2016

The zero cost collar contracts qualify as cash flow hedges under Accounting Standards Codification 815, “Derivatives and Hedging,” since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contracts. The Company is utilizing the “hypothetical derivative” method to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the “hypothetical derivative.”

The fair values of the Company’s outstanding zero cost collar contracts recorded as liabilities as of September 30, 2016 and December 31, 2015 are as follows (in thousands):

 

Derivatives designated as hedging instruments:						September 30, 2016				December 31, 2015
Liability Derivatives:
Zero cost collars			Other current liabilities			$	123			$	40

 

Offsetting of derivative liabilities as of September 30, 2016 is as follows (in thousands):

 

		Gross amounts of recognized liabilities				Gross amounts offset in the balance sheets				Net amounts of liabilities presented in the balance sheets				Gross amounts not offset in the balance sheets
As of September 30, 2016														Financial instruments				Cash collateral received/ pledged				Net amount
Liability Derivatives:
Zero cost collars		$	123			$	—			$	123			$	—			$	—			$	123

Offsetting of derivative liabilities as of December 31, 2015 is as follows (in thousands):

 

		Gross amounts of recognized liabilities				Gross amounts offset in the balance sheets				Net amounts of liabilities presented in the balance sheets				Gross amounts not offset in the balance sheets
As of December 31, 2015														Financial instruments				Cash collateral received/ pledged				Net amount
Liabilities Derivatives:
Zero cost collars		$	40			$	—			$	40			$	—			$	—			$	40

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the three months ended September 30, 2016 and 2015 (in thousands):

 

Derivatives in ASC 815 Cash Flow Hedging Relationships		Amount of Loss Recognized in AOCI on Derivatives (Effective Portion)								Location of Gain (Loss) Reclassified from AOCI into Statement of Operations (Effective Portion)				Amount of Gain (Loss) Reclassified from AOCI into Statement of Operations (Effective Portion)								Location of Loss Recognized in Statement of Operations on Derivative (Ineffective Portion)				Amount of Loss Recognized in Statement of Operations on Derivatives (Ineffective Portion)
		Three Months Ended September 30,												Three Months Ended September 30,												Three Months Ended September 30,
		2016				2015								2016				2015								2016				2015
Zero cost collars		$	(83	)		$	(2,869	)			Net sales			$	—			$	(1,579	)			Other income, net			$	(32	)		$	(271	)
Total		$	(83	)		$	(2,869	)						$	—			$	(1,579	)						$	(32	)		$	(271	)

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the nine months ended September 30, 2016 and 2015 (in thousands):

 

Derivatives in ASC 815 Cash Flow Hedging Relationships		Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)								Location of Gain (Loss) Reclassified from AOCI into Statement of Operations (Effective Portion)				Amount of Gain (Loss) Reclassified from AOCI into Statement of Operations (Effective Portion)								Location of Gain (Loss) Recognized in Statement of Operations on Derivative (Ineffective Portion)				Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives (Ineffective Portion)
		Nine Months Ended September 30,												Nine Months Ended September 30,												Nine Months Ended September 30,
		2016				2015								2016				2015								2016				2015
Zero cost collars		$	(42	)		$	(4,286	)			Net sales			$	—			$	(1,094	)			Other income, net			$	1			$	(577	)
Total		$	(42	)		$	(4,286	)						$	—			$	(1,094	)						$	1			$	(577	)

 

As of September 30, 2016, the amount expected to be reclassified from accumulated other comprehensive income into loss within the next twelve months is $83 thousand.

The Company set aside $2,100 thousand and $6,000 thousand of cash deposits to the counterparty, Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) as required for the zero cost collar contracts outstanding as of September 30, 2016 and December 31, 2015, respectively. These cash deposits are recorded as hedge collateral on the consolidated balance sheets.

The Company is required to deposit additional cash collateral with NFIK for any exposure in excess of $500 thousand, but no such excess exposure existed as of September 30, 2016. These outstanding zero cost collar contracts are subject to termination if the sum of qualified and unrestricted cash and cash equivalents held by the Company is less than $30,000 thousand on the last day of a fiscal quarter.