Blizzard 2015 Annual Report Download - page 52

Download and view the complete annual report

Please find page 52 of the 2015 Blizzard annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 108

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108

34
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include
fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Exchange Rate Risk
We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in
foreign currency exchange rates. Revenues and related expenses generated from our international operations are generally
denominated in their respective local currencies. Primary currencies include euros, British pounds, Australian dollars, South Korean
won and Swedish krona. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign
currency-denominated transactions results in reduced revenues, operating expenses, net income and cash flows from our international
operations. Similarly, our revenues, operating expenses, net income and cash flows will increase for our international operations if the
U.S. dollar weakens against foreign currencies. Since we have significant international sales, but incur the majority of our costs in the
United States, the impact of foreign currency fluctuations, particularly the strengthening of the U.S. dollar, may have an asymmetric
and disproportional impact on our business. We monitor currency volatility throughout the year.
To mitigate our foreign currency risk resulting from our foreign currency-denominated monetary assets, liabilities and earnings and
our foreign currency risk related to functional currency-equivalent cash flows resulting from our intercompany transactions, we
periodically enter into currency derivative contracts, principally forward contracts. These forward contracts generally have a maturity
of less than one year. The counterparties for our currency derivative contracts are large and reputable commercial or investment banks.
We assess the nature of these derivatives under FASB ASC Topic 815 to determine whether such derivatives should be designated as
hedging instruments. The fair value of foreign currency contracts are estimated based on the prevailing exchange rates of the various
hedged currencies as of the end of the period. We report the fair value of these contracts within “Other current assets,” “Accrued
expense and other liabilities,” “Other assets,” or “Other liabilities,” as applicable, in our Consolidated Balance Sheets based on the
prevailing exchange rates of the various hedged currencies as of the end of the relevant period.
We do not hold or purchase any foreign currency forward contracts for trading or speculative purposes.
Foreign Currency Forward Contracts Not Designated as Hedges
For foreign currency forward contracts entered into to mitigate risk from foreign currency-denominated monetary assets, liabilities,
and earnings that are not designated as hedging instruments under ASC 815, changes in the estimated fair value of these derivatives
are recorded within “General and administrative expenses” and “Interest and other expense, net” in our Consolidated Statements of
Operations, consistent with the nature of the underlying transactions.
At December 31, 2015, the gross notional amount of outstanding foreign currency forward contracts not designated as hedges was
approximately $489 million. During the year ended December 31, 2015, we reclassified $8 million of unrealized gains out of
“Accumulated other comprehensive income (loss)” and into earnings due to dedesignating $250 million notional euro to U.S. dollar
cash flow hedges when it was determined the hedged transaction would not occur. As a result of the dedesignation, we entered into
offsetting foreign currency forward contracts. The dedesignated and offsetting foreign currency forward contracts remain outstanding
as of December 31, 2015.
The fair value of these foreign currency forward currency contracts was $11 million as of December 31, 2015, and recorded in “Other
current assets” in our consolidated balance sheet.
At December 31, 2014, outstanding foreign currency forward contracts not designated as a hedge were not material.
For the years ended December 31, 2015, 2014, and 2013, pre-tax net gains associated with these forward contracts were recorded in
“General and administrative expenses” and were not material.
Foreign Currency Forward Contracts Designated as Hedges
For foreign currency forward contracts that we entered into to hedge forecasted intercompany cash flows that are subject to foreign
currency risk, and which have been designated as cash flow hedges in accordance with ASC 815, we assess the effectiveness of these
10-K Activision_Master_032416_PrinterMarksAdded.pdf 34 3/24/16 11:00 PM