Google 2009 Annual Report Download - page 95

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Google Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
fail. A discount factor was applied over these estimated cash flows of our ARS, which is calculated based on the
interpolated forward swap curve adjusted by up to 2,000 basis points to reflect the current market conditions for
instruments with similar credit quality at the date of the valuation and additionally adjusted for a liquidity discount
of up to 400 basis points to reflect the risk in the marketplace for these investments that has arisen due to the lack
of an active market.
At December 31, 2009, the estimated fair value of these ARS was $23.4 million less than their costs. As we
have no intent to sell these ARS and it is more-likely-than-not that we will not be required to sell these ARS prior to
recovery, we concluded the decline in the fair value was temporary and recorded the unrealized loss to
accumulated other comprehensive income on the accompanying Consolidated Balance Sheet at December 31,
2009.
To the extent we determine that any impairment is other-than-temporary, we would record a charge to
earnings. In addition, we have concluded that the auctions for these securities may continue to fail for at least the
next 12 months and as a result, we classified them as non-current assets on the accompanying Consolidated
Balance Sheet at December 31, 2009.
Liquidation of Investment in AOL
In 2009, we recognized a gain of $9.0 million on the sale of our equity investment in America Online, Inc. to
Time Warner Inc. for $283.0 million.
Note 4. Derivative Financial Instruments
We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows,
earnings, and fair value of certain marketable securities will be adversely affected by foreign currency exchange
rate fluctuations. Our program is not designated for trading or speculative purposes.
We recognize derivative instruments as either assets or liabilities on the balance sheet at fair value. We record
changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of
Income as interest income and other, net, as part of revenues, or to accumulated other comprehensive income
(AOCI) on the accompanying Consolidated Balance Sheets.
Cash Flow Hedges
We use options designated as cash flow hedges to hedge certain forecasted revenue transactions
denominated in currencies other than the U.S. dollar. We initially report any gain on the effective portion of a cash
flow hedge as a component of AOCI and we subsequently reclassify those gains to revenues when the hedged
revenues are recorded or as interest income and other, net, if the hedged transaction becomes probable of not
occurring.
At December 31, 2009, the effective portion of our cash flow hedges before tax effect was $15.5 million, of
which $8.9 million is expected to be reclassified from AOCI to revenues within the next 12 months.
We recognize any gain after a hedge is de-designated or related to an ineffective portion of a hedge in interest
income and other, net, immediately. Further, we exclude the change in the time value of the options from our
assessment of hedge effectiveness. We record the premium paid or time value of an option whose strike price is
equal to or greater than the market price on the date of purchase as an asset. Thereafter, we recognize any change
to this time value in interest income and other, net.
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