EMC 2003 Annual Report Download - page 41

The local currency is the functional currency of the majority of our subsidiaries. Assets and liabilities are translated into U.S. dollars at exchange rates in
effect at the balance sheet date, and income and expense items are translated at average rates for the period. Foreign currency transactions are included in
other expense, net, and consisted of losses of $13.3 million in 2003, $3.5 million in 2002 and $3.6 million in 2001.
Derivatives
We use derivatives to hedge foreign currency exposures related to foreign currency denominated assets and liabilities and forecasted revenue and
expense transactions.
We hedge our exposure in foreign currency denominated monetary assets and liabilities with foreign currency forward and option contracts. Since these
derivatives hedge existing exposures that are denominated in foreign currencies, the contracts do not qualify for hedge accounting. All outstanding derivatives
are recognized on the balance sheet at fair value and the changes in fair value from these contracts as well as the underlying exposures are generally offsetting,
and are recorded in other expense, net, in the statement of operations. These derivative contracts mature within one year or less.
We use foreign currency forward and option contracts to hedge our exposure on a portion of our forecasted revenue and expense transactions. These
derivatives are designated as cash flow hedges. All outstanding derivatives are recognized on the balance sheet at fair value and changes in their fair value are
recorded in accumulated other comprehensive income (loss) until the underlying forecasted transaction occurs. To achieve hedge accounting, the criteria
specified in Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instrument and Hedging Activities" must be met.
These criteria include (i) ensuring at the inception of the hedge that formal documentation exists for both the hedging relationship and the entity's risk
management objective and strategy for undertaking the hedge, and (ii) at the inception of the hedge and on an ongoing basis, the hedging relationship is
expected to be highly effective in achieving offsetting changes in fair value attributed to the hedged risk during the period that the hedge is designated.
Further, an assessment of effectiveness is required whenever financial statements or earnings are reported. Absent meeting these criteria, changes in fair value
are recognized currently in other expense, net in the statement of operations. Once the underlying forecasted transaction is realized, the gain or loss from the
derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the statement of operations, in the
related revenue or expense caption, as appropriate. In the event the underlying forecasted transaction does not occur, the amount recorded in accumulated
other comprehensive income (loss) will be reclassified to the other expense, net, in the statement of operations in the then-current period. Amounts
reclassified due to transactions that did not occur were not material for 2003, 2002 or 2001. Our cash flow hedges generally mature within six months or less.
There were no cash flow hedges outstanding as of December 31, 2003 or 2002.
59
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Any ineffective portion of the derivatives designated as cash flow hedges is recognized in current earnings, which did not represent a material amount for
the fiscal years presented. The ineffective portion of the derivatives consists of option premiums, discounts or premiums on forward contracts and gains or
losses associated with differences between actual and forecasted amounts.
We do not engage in currency speculation. For purposes of presentation within the statement of cash flows, derivative gains and losses are presented
within cash provided by operating activities.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with a maturity of ninety days or less at the time of purchase. Cash equivalents consist
primarily of money market securities, U.S. treasury bills, U.S. agency discount notes and commercial paper. Cash equivalents are stated at amortized cost plus
accrued interest, which approximates market. Total cash equivalents were $1,273.9 million and $1,223.6 million at December 31, 2003 and 2002,
respectively.
Investments
Our investments are comprised primarily of debt securities that are classified as available-for-sale and recorded at their fair market value. Investments
with remaining maturities of less than twelve months from the balance sheet date are classified as short-term investments. Investments with remaining
maturities of more than twelve months from the balance sheet date are classified as long-term investments.
We also hold strategic equity investments. Strategic equity investments in publicly traded companies are classified as available-for-sale when there are
no restrictions on our ability to liquidate such securities. These investments are also carried at their market value. Strategic equity investments in privately-
held companies are carried at the lower of cost or net realizable value due to their illiquid nature. We review these investments to ascertain whether unrealized
losses are other than temporary.
Unrealized gains and temporary losses on investments classified as available-for-sale are included as a separate component of stockholders' equity, net of
any related tax effect. Realized gains and losses on non-strategic investments are reflected in the statement of operations in investment income. Realized gains
and losses and other-than-temporary impairments on strategic investments are reflected in the statement of operations in other expense, net. Investment
activity is accounted for using the average cost method.
Statement of Cash Flows Supplemental Information (table in thousands):
2003 2002 2001
Cash paid (received) for:
Income taxes $(152,313) $(119,713) $175,541
Interest 3,067 11,797 10,978