Adobe 2009 Annual Report Download - page 84

ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
84
Foreign Currency and Other Hedging Instruments
In countries outside the United States (“U.S.”), we transact business in U.S. dollars and in various other currencies. In
Europe and Japan, transactions that are denominated in Euro and Yen are subject to exposure from movements in exchange
rates. We hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce
the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. We use foreign exchange
option and forward contracts for Euro- and Yen-denominated revenue.
We account for our derivative instruments as either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and
whether it is designated and qualifies for hedge accounting. Derivatives that do not qualify for hedge accounting are adjusted
to fair value through earnings. See Note 5 for information regarding our hedging activities.
Gains and losses from foreign exchange forward contracts which hedge certain balance sheet positions, primarily non-
functional currency denominated assets and liabilities (e.g., trade receivables and accounts payable) are recorded each period
as a component of interest and other income, net in our Consolidated Statements of Income. Foreign exchange forward and
option contracts hedging forecasted non-functional currency product licensing revenue, are designated as cash flow hedges
under accounting for derivative instruments and hedging activities, with gains and losses recorded net of tax, as a component
of other comprehensive income in stockholders’ equity and reclassified into revenue at the time the forecasted transactions
occur.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is
recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities
are recognized for expected future tax consequences of temporary differences between the financial reporting and tax bases
of assets and liabilities, and for operating losses and tax credit carryforwards. We record a valuation allowance to reduce
deferred tax assets to an amount for which realization is more likely than not.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition standards for
arrangements with multiple deliverables, where certain of those deliverables are non-software related. The new standards
permit entities to initially use management’s best estimate of selling price to value individual deliverables when those
deliverables do not have VSOE of fair value or when third-party evidence is not available. Additionally, these new standards
modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no
longer permitting the residual method of allocating arrangement consideration. These new standards are effective for annual
periods ending after June 15, 2010 and are effective for us beginning in the first quarter of fiscal 2011, however early
adoption is permitted. We are currently evaluating the impact of adopting these new standards on our consolidated financial
position, results of operations and cash flows, including possible early adoption.
In June 2009, the FASB issued the FASB Accounting Standards Codification (the “Codification”) for financial
statements issued for interim and annual periods ending after September 15, 2009, which was effective for us beginning in
the fourth quarter of fiscal 2009. The Codification became the single authoritative source for GAAP. Accordingly, previous
references to GAAP accounting standards are no longer used in our disclosures, including these Notes to the Consolidated
Financial Statements. The Codification does not affect our consolidated financial position, cash flows, or results of
operations.
In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity.
These new standards amend the evaluation criteria to identify the primary beneficiary of a variable interest entity and
requires ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The
provisions of the new standards are effective for annual reporting periods beginning after November 15, 2009 and interim
periods within those fiscal years. These standards will be effective for us beginning in the first quarter of fiscal 2010. The
adoption of the new standards will not have an impact on our consolidated financial position, results of operations and cash
flows.