Google 2012 Annual Report Download - page 65

59GOOGLE INC. |Form10-K
PART II
ITEM8.Notes to Consolidated Financial Statements
As of December31, 2012
Less than 12 Months 12 Months or Greater Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
U.S. government notes $ 842 $ (1) $ 0 $ 0 $ 842 $ (1)
Foreign government bonds 509 (2) 12 (1) 521 (3)
Municipal securities 686 (6) 9 0 695 (6)
Corporate debt securities 820 (10) 81 (4) 901 (14)
Agency residential
mortgage-backed securities 1,300 (6) 0 0 1,300 (6)
Total $4,157 $(25) $102 $(5) $ 4,259 $(30)
Securities Lending Program
From time to time, we enter into securities lending agreements with fi nancial institutions to enhance investment income. We loan
selected securities which are secured by collateral in the form of cash or securities. Cash collateral is invested in reverse repurchase
agreements. We classify loaned securities as cash equivalents or marketable securities on the accompanying Consolidated Balance
Sheets.We record the cash collateral as an asset with a corresponding liability. We classify reverse repurchase agreements
maturing within three months as cash equivalents and those longer than three months as receivable under reverse repurchase
agreements on the accompanying Consolidated Balance Sheets. For lending agreements collateralized by securities, we do not
record an asset or liability as we are not permitted to sell or repledge the associated collateral.
Derivative Financial Instruments
We enter into foreign currency contracts with fi nancial institutions to reduce the risk that our cash fl ows and earnings will be
adversely aff ected by foreign currency exchange rate fl uctuations. We use certain interest rate derivative contracts to hedge
interest rate exposures on our fi xed income securities and our anticipated debt issuance. Our program is not designated for
trading or speculative purposes.
We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same
company. To further reduce credit risk, we enter into collateral security arrangements that provide for collateral to be received
when the net fair value of certain fi nancial instruments fl uctuates from contractually established thresholds. We present our
derivative assets and derivative liabilities at their gross fair values. At December31, 2011 and December31, 2012, we received
cash collateral related to the derivative instruments under our collateral security arrangements of $113million and $43million,
which are recorded as accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets.
We recognize derivative instruments as either assets or liabilities on the accompanying Consolidated Balance Sheets 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 and other income, net, as part of revenues, or to accumulated other comprehensive income (AOCI) in the
accompanying Consolidated Balance Sheets.
Cash Flow Hedges
We use options designated as cash fl ow hedges to hedge certain forecasted revenue transactions denominated in currencies other
than the U.S. dollar. The notional principal of these contracts was approximately $6.5billion and $9.5billion as of December31,
2011 and December31, 2012. These foreign exchange contracts have maturities of 36 months or less.
During the second quarter of 2012, we began to hedge the variability of forecasted interest payments on an anticipated debt
issuance using forward-starting interest swaps. The total notional amount of these forward-starting interest swaps was $1.0billion
as of December31, 2012 with terms calling for us to receive interest at a variable rate and to pay interest at a fi xed rate. These
forward-starting interest swaps eff ectively fi x the benchmark interest rate on an anticipated debt issuance of $1.0billion in 2014,
and they will be terminated upon issuance of the debt.
We initially report any gain or loss on the eff ective portion of a cash fl ow hedge as a component of AOCI and subsequently reclassify
to revenues or interest expense when the hedged transactions are recorded. If the hedged transactions become probable of
not occurring, the corresponding amounts in AOCI would be reclassifi ed to interest and other income, net. Further, we exclude
the change in the time value of the options from our assessment of hedge eff ectiveness. We record the premium paid or time
value of an option on the date of purchase as an asset. Thereafter, we recognize any change to this time value in interest and
other income, net.
As of December31, 2012, the eff ective portion of our cash fl ow hedges before tax eff ect was $11million, $10million of which is
expected to be reclassifi ed from AOCI to revenues within the next 12 months.
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