Adobe 2010 Annual Report Download - page 91

ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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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.
Taxes Collected from Customers
We net taxes collected from customers against those remitted to government authorities in our financial statements.
Accordingly, taxes collected from customers are not reported as revenue.
Treasury Stock
We account for treasury stock under the cost method. When treasury stock is re-issued at a price higher than its cost, the
difference is recorded as a component of additional paid-in-capital in our Consolidated Balance Sheets. When treasury stock
is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent
that there are gains to offset the losses. If there are no treasury stock gains in additional paid-in-capital, the losses upon re-
issuance of treasury stock are recorded as a component of retained earnings in our Consolidated Balance Sheets.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses for fiscal 2010, 2009 and 2008 were $65.9 million,
$67.0 million and $67.1 million, respectively.
Foreign Currency Translation
We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange
rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We
include accumulated net translation adjustments in stockholders’ equity as a component of accumulated other comprehensive
income.
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, Yen and British Pounds 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,-Yen- and British Pound-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 (“OCI”) in stockholders’ equity and reclassified into revenue at the time the forecasted
transactions occur.
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk are short-term fixed-income investments,
structured repurchase transactions, derivatives hedging foreign currency risk, and trade receivables.
Our investment portfolio consists of investment-grade securities diversified among security types, industries and issuers.
Our cash and investments are held and managed by recognized financial institutions that follow our investment policy. Our
policy limits the amount of credit exposure to any one security issue or issuer and we believe no significant concentration of
credit risk exists with respect to these investments.