Amazon.com 2002 Annual Report Download - page 68

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Foreign Currency
The Company has the following internationally-focused Web sites: www.amazon.co.uk,
www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.ca. Net sales generated from these
Web sites, as well as most of the related expenses incurred, are denominated in the functional currencies
of the Web sites. Additionally, the functional currency of the Company's subsidiaries that either operate or
support www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.ca is
the same as the local currency of the United Kingdom, Germany, France, Japan and Canada, respectively.
Assets and liabilities of these subsidiaries are translated into U.S. Dollars at year-end exchange rates, and
revenues and expenses are translated at average rates prevailing during the year. Translation adjustments
are included in ""Accumulated other comprehensive income (loss),'' a separate component of stockholders'
deÑcit. Transaction gains and losses arising from transactions denominated in a currency other than the
functional currency of the entity involved, are included in ""Other income (expense), net'' on the
consolidated statements of operations. See ""Note 11 Ì Other Income (Expense), Net.''
Derivative Financial Instruments
EÅective January 1, 2001, the Company adopted SFAS No. 133, ""Accounting for Derivative
Instruments and Hedging Activities,'' which requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current
results of operations or other comprehensive income (loss) depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge transaction. For a derivative designated as a
fair value hedge, the gain or loss of the derivative in the period of change and the oÅsetting loss or gain of
the hedged item attributed to the hedged risk are recognized in results of operations. For a derivative
designated as a cash Öow hedge, the eÅective portion of the derivative's gain or loss is initially reported as
a component of other comprehensive income (loss) and subsequently reclassiÑed into results of operations
when the hedged exposure aÅects results of operations. The ineÅective portion of the gain or loss of a cash
Öow hedge is recognized currently in results of operations. For a derivative not designated as a hedging
instrument, the gain or loss is recognized currently in results of operations.
The Company is exposed to the risk of Öuctuations in foreign exchange rates between the U.S. Dollar
and the Euro associated with its 6.875% Convertible Subordinated Notes due 2010 (""6.875% PEACS'')
(See ""Note 6 Ì Long-Term Debt and Other''). To minimize a portion of the risk from this exposure, the
Company has designated a swap agreement as a cash Öow hedge of a portion of the 6.875% PEACS'
principal and interest based upon the criteria established by SFAS No. 133. The terms of the hedge
instrument have been structured to match the related terms of the hedged portion of the 6.875% PEACS.
No net gains or losses resulting from hedge ineÅectiveness were recognized in results of operations during
the years ended December 31, 2002 and 2001, respectively.
The Company holds warrants to purchase equity securities of other companies. Warrants that can be
exercised and settled by delivery of net shares such that the Company pays no cash upon exercise are
deemed derivative Ñnancial instruments. Net share warrants are not designated as hedging instruments;
accordingly, gains or losses resulting from changes in fair value are recognized on the consolidated
statements of operations, ""Other gains (losses), net,'' in the period of change. The Company determines
the fair value of its warrants through option-pricing models using current market price and volatility
assumptions, including public-company market comparables for its private-company warrants.
The adoption of SFAS No. 133 on January 1, 2001 resulted in cumulative transition losses of
$11 million included in the results of operations and a stockholders' deÑcit adjustment of $12 million.
Transition losses included in ""Cumulative eÅect of change in accounting principle'' are attributable to
approximately $3 million in losses reclassiÑed from ""Accumulated other comprehensive income (loss)'' on
warrants previously reported at fair value and classiÑed as available-for-sale, and approximately $8 million
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