Citrix 2009 Annual Report Download - page 96

CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
constitute a majority of its revenue. The Company could experience declines in demand for its Desktop Solutions
and other products, whether as a result of general economic conditions, the delay or reduction in technology
purchases, new competitive product releases, price competition, lack of success of its strategic partners,
technological change or other factors.
Cost of Net Revenues
Cost of product license revenues consists primarily of hardware, product media and duplication, manuals,
packaging materials, shipping expense, server capacity costs and royalties. In addition, the Company is a party to
licensing agreements with various entities, which give the Company the right to use certain software code in its
products or in the development of future products in exchange for the payment of fixed fees or amounts based
upon the sales of the related product. The licensing agreements generally have terms ranging from one to five
years, and generally include renewal options. However, some agreements may be perpetual unless expressly
terminated. Royalties and other costs related to these agreements are included in cost of net revenues. Cost of
services revenue consists primarily of compensation and other personnel-related costs of providing technical
support and consulting, as well as the Company’s online services. Also included in cost of net revenues is
amortization of product related intangible assets which includes acquired core and product technology and
associated patents.
Foreign Currency
The functional currency for substantially all of the Company’s wholly-owned foreign subsidiaries is the
U.S. dollar. Monetary assets and liabilities of the subsidiaries are remeasured into U.S. dollars at exchange rates
in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during
the year. Remeasurement and foreign currency transaction gains (losses) of approximately $4.1 million, $(6.0)
million and $0.6 million for the years ended December 31, 2009, 2008, and 2007, respectively, are included in
other income (expense), net, in the accompanying consolidated statements of income.
Derivatives and Hedging Activities
In accordance with the FASB’s authoritative guidance governing derivatives, the Company records
derivatives at fair value as either assets or liabilities on the balance sheet. For derivatives that are designated as
and qualify as effective cash flow hedges, the portion of gain or loss on the derivative instrument effective at
offsetting changes in the hedged item is reported as a component of accumulated other comprehensive income
(loss) and reclassified into earnings as operating expense, net, when the hedged transaction affects earnings. For
derivative instruments that are designated as and qualify as effective fair value hedges, the gain or loss on the
derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, is
recognized in current earnings as interest income or interest expense during the period of the change in fair
values. Derivatives not designated as hedging instruments are adjusted to fair value through earnings as other
income (expense), net, in the period the changes in fair value occur. The application of the FASB’s authoritative
guidance governing derivatives could impact the volatility of earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well
as its risk-management objective and strategy for undertaking various hedge transactions. This process includes
attributing all derivatives that are designated as cash flow hedges to floating rate assets or liabilities or forecasted
transactions and attributing all derivatives that are designated as fair value hedges to fixed rate assets or
liabilities. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis,
whether each derivative is highly effective in offsetting changes in cash flows or fair value of the hedged item.
Fluctuations in the value of the derivative instruments are generally offset by changes in the hedged item;
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