Amazon.com 2003 Annual Report Download - page 63

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
functional currencies of the resident countries. Additionally, the functional currency of our 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.
Assets and liabilities of these subsidiaries are translated into U.S. Dollars at period-end exchange rates, and
revenues and expenses are translated at average rates prevailing throughout the period. Translation adjustments
are included in “Accumulated other comprehensive income (loss),” a separate component of stockholders’ deficit
and in the “Effect of exchange-rate changes on cash and cash equivalents,” on the consolidated statements of
cash flows. 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—Other Income (Expense), Net.”
A provision of SFAS No. 52, Foreign Currency Translation, requires that gains and losses arising from
intercompany foreign currency transactions considered long-term investments, where settlement is not planned or
anticipated in the foreseeable future, be excluded in the determination of net income. Our international operations
are financed, in part, by the U.S. parent company. Currency adjustments for these intercompany balances were
historically recorded to equity as translation adjustments and not included in the determination of net income
because we intended to permanently invest such amounts. During the fourth quarter of 2003, we made the decision
that these amounts would be repaid among the entities and, accordingly, upon consolidation any exchange gain or
loss arising from remeasurement of intercompany balances is required to be recorded in the determination of net
income. The effect for the fourth quarter of 2003 and the year ended December 31, 2003 was to increase net income
by $36 million. The effect of this treatment was very significant to our net income for the year and for the quarter.
Had we not changed our intent as to the settlement of these intercompany balances, we would have had a net loss
for 2003 and our net income for the fourth quarter of 2003 would have been reduced by almost 50%. See “Note 12 –
Remeasurement of 6.875% PEACS and Other” for further discussion.
Derivative Financial Instruments
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, we record
derivative instruments on the consolidated balance sheets 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
offsetting 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 flow hedge, the effective portion of the derivative’s gain or loss is initially
reported as a component of other comprehensive income (loss) and subsequently reclassified into results of
operations when the hedged exposure affects results of operations. The ineffective portion of the gain or loss of a
cash flow 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.
We are exposed to the risk of fluctuations in foreign exchange rates between the U.S. Dollar and the Euro
associated with our 6.875% PEACS (See “Note 6—Long-Term Debt and Other”). Currency gains and losses
arising from the remeasurement of the 6.875% PEACS’ principal from Euros to U.S. Dollars each period are
recorded to “Remeasurement of 6.875% PEACS and other.” During the second quarter of 2003, we terminated
our Euro Currency Swap that previously was designated as a cash flow hedge of a portion of the 6.875% PEACS’
principal and interest. See “Note 6—Long-Term Debt and Other.”
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