Cisco 2013 Annual Report Download - page 90

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or
liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which
significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant
to the measurement of the fair value of the assets or liabilities.
(l) Derivative Instruments The Company recognizes derivative instruments as either assets or liabilities and measures those
instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. For a derivative instrument designated as a fair value hedge, the gain or loss is
recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk
being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss
is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects
earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For a derivative instrument designated
as a net investment hedge of the Company’s foreign operations, the gain or loss is recorded in the cumulative translation
adjustment within AOCI together with the offsetting loss or gain of the hedged exposure of the underlying foreign operations.
Any ineffective portion of the net investment hedges is reported in earnings during the period of change. For derivative
instruments that are not designated as accounting hedges, changes in fair value are recognized in earnings in the period of
change. The Company records derivative instruments in the statements of cash flows to operating, investing, or financing
activities consistent with the cash flows of the hedged item.
Hedge effectiveness for foreign exchange forward contracts used as cash flow hedges is assessed by comparing the change in
the fair value of the hedge contract with the change in the fair value of the forecasted cash flows of the hedged item. Hedge
effectiveness for equity forward contracts and foreign exchange net investment hedge forward contracts is assessed by
comparing changes in fair value due to changes in spot rates for both the derivative and the hedged item. For foreign exchange
option contracts, hedge effectiveness is assessed based on the hedging instrument’s entire change in fair value. Hedge
effectiveness for interest rate swaps is assessed by comparing the change in fair value of the swap with the change in the fair
value of the hedged item due to changes in the benchmark interest rate.
(m) Foreign Currency Translation Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment,
where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance
sheet date, with the resulting translation adjustments directly recorded to a separate component of AOCI. Income and expense
accounts are translated at average exchange rates during the year. Remeasurement adjustments are recorded in other income
(loss), net. The effect of foreign currency exchange rates on cash and cash equivalents was not material for any of the fiscal
years presented.
(n) Concentrations of Risk Cash and cash equivalents are maintained with several financial institutions. Deposits held with
banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon
demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The
Company seeks to mitigate its credit risks by spreading such risks across multiple counterparties and monitoring the risk
profiles of these counterparties.
The Company performs ongoing credit evaluations of its customers and, with the exception of certain financing transactions,
does not require collateral from its customers. The Company receives certain of its components from sole suppliers.
Additionally, the Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing
services for its products. The inability of a contract manufacturer or supplier to fulfill supply requirements of the Company
could materially impact future operating results.
(o) Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the
product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. For
hosting arrangements, the Company recognizes subscription revenue ratably over the subscription period, while usage revenue
is recognized based on utilization. Technical support services revenue is deferred and recognized ratably over the period
during which the services are to be performed, which is typically from one to three years. Advanced services transactional
revenue is recognized upon delivery or completion of performance.
The Company uses distributors that stock inventory and typically sell to systems integrators, service providers, and other
resellers. The Company refers to this as its two-tier system of sales to the end customer. Revenue from distributors is
recognized based on a sell-through method using information provided by them. Distributors participate in various cooperative
marketing and other programs, and the Company maintains estimated accruals and allowances for these programs. The
Company accrues for warranty costs, sales returns, and other allowances based on its historical experience. Shipping and
handling fees billed to customers are included in revenue, with the associated costs included in cost of sales.
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