Cisco 2012 Annual Report Download - page 81

Off-Balance Sheet Arrangements
We consider our investments in unconsolidated variable interest entities to be off-balance sheet arrangements. In
the ordinary course of business, we have investments in privately held companies and provide financing to
certain customers. These privately held companies and customers may be considered to be variable interest
entities. We evaluate on an ongoing basis our investments in these privately held companies and customer
financings and we have determined that as of July 28, 2012 there were no material unconsolidated variable
interest entities.
VCE is a joint venture that we formed in fiscal 2010 with EMC Corporation (“EMC”), with investments from
VMware, Inc. (“VMware”) and Intel Corporation. VCE helps organizations leverage best-in-class technologies
and disciplines from Cisco, EMC, and VMware to enable the transformation to cloud computing. As of July 28,
2012, our cumulative gross investment in VCE was approximately $392 million, inclusive of accrued interest,
and our ownership percentage was approximately 35%. During fiscal 2012, we invested approximately $276
million in VCE. We account for our investment in VCE under the equity method and our portion of VCE’s net
loss is recognized in other income, net. As of July 28, 2012, we have recorded cumulative losses since inceptions
from VCE of $239 million. Our carrying value in VCE as of July 28, 2012 was $153 million. Over the next 12
months, as VCE scales its operations, we expect that we will make additional investments in VCE and may incur
additional losses proportionate with our share ownership.
From time to time, EMC and Cisco may enter into guarantee agreements on behalf of VCE to indemnify third
parties, such as customers, for monetary damages. Such guarantees were not material as of July 28, 2012.
On an ongoing basis, we reassess our investments in privately held companies and customer financings to
determine if they are variable interest entities and if we would be regarded as the primary beneficiary pursuant to
the applicable accounting guidance. As a result of this ongoing assessment, we may be required to make
additional disclosures or consolidate these entities. Because we may not control these entities, we may not have
the ability to influence these events.
We provide financing guarantees, which are generally for various third-party financing arrangements extended to
our channel partners and end-user customers. We could be called upon to make payments under these guarantees
in the event of nonpayment by the channel partners or end-user customers. See the previous discussion of these
financing guarantees under “Financing Receivables and Guarantees.”
Securities Lending
We periodically engage in securities lending activities with certain of our available-for-sale investments. These
transactions are accounted for as a secured lending of the securities, and the securities are typically loaned only
on an overnight basis. The average daily balance of securities lending for fiscal 2012 and 2011 was $0.5 billion
and $1.6 billion, respectively. We require collateral equal to at least 102% of the fair market value of the loaned
security and that the collateral be in the form of cash or liquid, high-quality assets. We engage in these secured
lending transactions only with highly creditworthy counterparties, and the associated portfolio custodian has
agreed to indemnify us against collateral losses. As of July 28, 2012 and July 30, 2011, we had no outstanding
securities lending transactions. We believe these arrangements do not present a material risk or impact to our
liquidity requirements.
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