Computer Associates 2007 Annual Report Download - page 69

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, “Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 provides interpretive guidance on how
registrants should quantify financial statement misstatements. There is currently diversity in practice, with the two
commonly used methods to quantify misstatements being the “rollover” method (which primarily focuses on the income
statement impact of misstatements) and the “iron curtain” method (which focuses on the balance sheet impact). SAB 108
requires registrants to use a dual approach whereby both of these methods are considered in evaluating the materiality of
financial statement errors. Prior materiality assessments will need to be considered using both the rollover and iron curtain
methods. The adoption of SAB 108 did not have a material impact on our Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including
an amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159 permits entities to elect to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are currently assessing the impact of SFAS No. 159 on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio, debt, and installment
accounts receivable. We have a prescribed methodology whereby we invest our excess cash in liquid investments that are
composed of money market funds and debt instruments of government agencies and high-quality corporate issuers (Standard &
Poor’s single “A” rating and higher). To mitigate risk, many of the securities have a maturity date within one year, and holdings of any
one issuer, excluding the U.S. government, do not exceed 10% of the portfolio. Periodically, the portfolio is reviewed and adjusted if
the credit rating of a security held has deteriorated.
As of March 31, 2007, our outstanding debt approximated $2.58 billion, most of which was in fixed rate obligations. If market
rates were to decline, we could be required to make payments on the fixed rate debt that would exceed those based on current
market rates. Each 25 basis point decrease in interest rates would have an associated annual opportunity cost of
approximately $5 million. Each 25 basis point increase or decrease in interest rates would have a corresponding effect
on our variable rate debt of approximately $2 million as of March 31, 2007.
As of March 31, 2007, we did not utilize derivative financial instruments to mitigate the above mentioned interest rate risks.
We offer financing arrangements with installment payment terms in connection with our software license agreements. The
aggregate amounts due from customers include an imputed interest element, which can vary with the interest rate
environment. Each 25 basis point increase in interest rates would have an associated annual opportunity cost of
approximately $8 million.
Foreign Currency Exchange Risk
We conduct business on a worldwide basis through subsidiaries in 46 countries and, as such, a portion of our revenues,
earnings, and net investments in foreign affiliates are exposed to changes in foreign exchange rates. We seek to manage our
foreign exchange risk in part through operational means, including managing expected local currency revenues in relation to
local currency costs and local currency assets in relation to local currency liabilities. In October 2005, the Board of Directors
adopted our Risk Management Policy and Procedures, which authorizes us to manage, based on management’s assessment,
our risks and exposures to foreign currency exchange rates through the use of derivative financial instruments (e.g., forward
contracts, options, swaps) or other means. We have not historically used, and do not anticipate using, derivative financial
instruments for speculative purposes.
Derivatives are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (FAS 133). For the fiscal year ended March 31, 2007, we entered into
derivative contracts with a total notional value of approximately 208 million euros and 2.5 billion yen, of which 75 million
euros were outstanding as of March 31, 2007. We entered into these contracts with the intent of mitigating a certain portion of
our euro and yen operating exposure as part of the Company’s on-going risk management program. These contracts did not
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