Avid 2011 Annual Report Download - page 49

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Exchange Risk
We have significant international operations and, therefore, our revenues, earnings, cash flows and financial position are exposed
to foreign currency risk from foreign-currency-denominated receivables, payables, sales transactions and net investments in
foreign operations. We derive more than half of our revenues from customers outside the United States. This business is, for the
most part, transacted through international subsidiaries and generally in the currency of the end-user customers. Therefore, we
are exposed to the risks that changes in foreign currency could adversely affect our revenues, net income and cash flow.
We may use derivatives in the form of foreign currency forward contracts to manage certain short-term exposures to fluctuations
in the foreign currency exchange rates that exist as part of our ongoing international business operations. We do not enter into any
derivative instruments for trading or speculative purposes. The success of our hedging programs depends on forecasts of
transaction activity in the various currencies and contract rates versus financial statement rates. To the extent these forecasts are
overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses.
As required by FASB ASC Topic 815, Derivatives and Hedging, we record all derivatives on the balance sheet at fair value. The
accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to
designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied
the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as hedges of the exposure to changes in
the fair value of an asset, liability or firm commitment attributable to a particular risk are considered fair value hedges.
Derivatives designated and qualifying as hedges of the exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency
exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain
or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash
flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of its risks, even though we
elect not to apply hedge accounting under ASC Topic 815.
From time to time, we may execute foreign currency forward contracts to hedge the foreign exchange currency risk associated
with certain forecasted euro-denominated sales transactions. These contracts are designated and intended to qualify as cash flow
hedges under the criteria of ASC Topic 815. The effective portion of the changes in the fair value of derivatives designated and
qualifying as cash flow hedges is initially reported as a component of accumulated other comprehensive income (loss) in
stockholders' equity and subsequently reclassified into revenues at the time the hedged transactions affect earnings. The
ineffective portion of the change in fair value is recognized directly into earnings. To date, no amounts have been recorded as a
result of hedging ineffectiveness.
During the year ended December 31, 2011, we did not execute foreign currency forward contracts as a hedge against forecasted
euro-denominated sales transactions, and we did not have any such contracts outstanding at either December 31, 2011 or 2010.
For the year ended December 31, 2010, net losses of $1.8 million resulting from such forward contracts were included in our
revenues.
In an effort to hedge against the foreign exchange exposure of certain forecasted receivables, payables and cash balances, we
enter into short-term foreign currency forward contracts. There are two objectives of this foreign currency forward-contract
program: (1) to offset any foreign exchange currency risk associated with cash receipts expected to be received from our
customers and cash payments expected to be made to our vendors over the next 30-day period and (2) to offset the impact of
foreign currency exchange on our net monetary assets denominated in currencies other than the functional currency of the legal
entity. These forward contracts typically mature within 30 days of execution. We record gains and losses associated with
currency rate changes on these contracts in results of operations, offsetting gains and losses on the related assets and liabilities.
At December 31, 2011, we had foreign currency forward contracts outstanding with an aggregate notional value of $69.1 million,
denominated in the euro, British pound, Japanese yen, Canadian dollar, Singapore dollar and Danish kroner, as a hedge against
actual and forecasted foreign-currency-denominated receivables, payables and cash balances. At December 31, 2011, the fair
value of the foreign currency forward contracts was $1.4 million, representing a net unrealized loss consisting of a net unrealized
loss of $1.4 million from contracts that matured on, but were unsettled at, December 31, 2011, and an immaterial mark-to-market
net unrealized gain from contracts with maturity dates after December 31, 2011. For the year ended December 31, 2011, net
losses of $0.6 million resulting from forward contracts and $1.1 million of net transaction and remeasurement gains on the related