Google 2010 Annual Report Download - page 57

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in currency exchange rates and interest rates.
Foreign Currency Exchange Risk
Economic Exposure
We transact business in various foreign currencies and have significant international revenues, as well as
costs denominated in foreign currencies. This exposes us to the risk of fluctuations in foreign currency exchange
rates. We purchase foreign exchange option contracts to reduce the volatility of cash flows related to forecasted
revenues denominated in certain foreign currencies. The objective of the foreign exchange contracts is to better
ensure that the U.S. dollar-equivalent cash flows are not adversely affected by changes in the U.S. dollar/foreign
currency exchange rates. These contracts are designated as cash flow hedges. The gain on the effective portion of
a cash flow hedge is initially reported as a component of accumulated other comprehensive income and
subsequently reclassified into revenues when the hedged revenues are recorded or as interest and other income,
net, if the hedged transaction becomes probable of not occurring. Any gain after a hedge is de-designated or
related to an ineffective portion of a hedge is recognized as interest and other income, net, immediately.
At December 31, 2009, the notional principal and fair value of foreign exchange contracts to purchase U.S.
dollars with Euros were €1.6 billion (or approximately $2.2 billion) and $59 million; the notional principal and fair
value of foreign exchange contracts to purchase U.S. dollars with British pounds were £809 million (or
approximately $1.3 billion) and $39 million; and the notional principal and fair value of foreign exchange contracts
to purchase U.S. dollars with Canadian dollars were C$306 million (or approximately $268 million) and $6 million.
At December 31, 2010, the notional principal and fair value of foreign exchange contracts to purchase U.S. dollars
with Euros were €3.0 billion (or approximately $4.1 billion) and $227 million; the notional principal and fair value of
foreign exchange contracts to purchase U.S. dollars with British pounds were £1.5 billion (or approximately $2.3
billion) and $97 million; and the notional principal and fair value of foreign exchange contracts to purchase U.S.
dollars with Canadian dollars were C$407 million (or approximately $382 million) and $6 million. These foreign
exchange options have maturities of 36 months or less. There are no other foreign exchange contracts designated
as cash flow hedges. However, we may enter into similar contracts in other foreign currencies in the future.
We considered the historical trends in currency exchange rates and determined that it was reasonably
possible that changes in exchange rates of 20% for our foreign currencies instruments could be experienced in the
near term.
If the U.S. dollar weakened by 20%, the amount recorded in accumulated other comprehensive income
before tax effect would have been approximately $15 million and $140 million lower at December 31, 2009 and
2010, and the total amount of expense recorded as interest and other income, net, would have been approximately
$68 million and $134 million higher in the years ended December 31, 2009 and 2010. If the U.S. dollar
strengthened by 20%, the amount recorded in accumulated other comprehensive income before tax effect would
have been approximately $555 million and $1.2 billion higher at December 31, 2009 and 2010, and the total
amount of expense recorded as interest and other income, net, would have been approximately $75 million and
$175 million higher in the years ended December 31, 2009 and 2010.
Transaction Exposure
Our exposure to foreign currency transaction gains and losses is the result of certain net receivables due from
our foreign subsidiaries and customers being denominated in currencies other than the functional currency of the
subsidiary, primarily the Euro, the British pound, and the Japanese yen. Our foreign subsidiaries conduct their
businesses in local currency. We have entered into foreign exchange contracts to offset the foreign exchange risk
on certain monetary assets and liabilities denominated in currencies other than the local currency of the subsidiary.
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