Netgear 2012 Annual Report Download - page 76

Table of Contents NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Derivative Financial Instruments
The Company’
s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are
denominated in currencies other than the Company’
s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the
functional currency. Changes in exchange rates between the Company’
s functional currency and other currencies in which the Company transacts
business will cause fluctuations in cash flow expectations and cash flow realized or settled. Accordingly, the Company uses derivatives to mitigate its
business exposure to foreign exchange risk. The Company enters into foreign currency forward contracts in Australian dollars, British pounds, Euros,
and Japanese yen to manage the exposures to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of
revenue, operating expenses and existing assets and liabilities. The Company does not enter into derivatives transactions for trading or speculative
purposes.
The Company’s foreign currency forward contracts do not contain any credit-risk-
related contingent features. The Company is exposed to
credit losses in the event of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-
quality financial institutions and limits the amount of credit exposure to any one counter-
party. In addition, the derivative contracts typically mature
in less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-
parties to
these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk.
The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, immateriality,
accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more
than a portion of the financial impact resulting from movements in foreign exchange rates. The Company’
s accounting policies for these instruments
are based on whether the instruments are designated as hedge or non-
hedge instruments in accordance with the authoritative guidance for derivatives
and hedging. The Company records all derivatives on the balance sheet at fair value. The effective portions of cash flow hedges are recorded in other
comprehensive income until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective
portions of its designated hedges are adjusted to fair value through earnings in other income (expense), net in the consolidated statement of
operations.
The fair values of the Company’
s derivative instruments and the line items on the consolidated balance sheet to which they were recorded as of
December 31, 2012 , and December 31, 2011 , are summarized as follows (in thousands):
For details of the Company’s fair value measurements, see Note 13, Fair Value Measurements.
72
Derivative Assets
Balance Sheet
Location
Fair value at
December 31, 2012
Balance Sheet
Location
Fair value at
December 31, 2011
Derivative assets not designated as hedging
instruments
Prepaid expenses and
other current assets
$
1,142
Prepaid expenses and
other current assets
$
1,196
Derivative assets designated as hedging
instruments
Prepaid expenses and
other current assets
2
Prepaid expenses and
other current assets
41
Total
$
1,144
$
1,237
Derivative Liabilities
Balance Sheet
Location
Fair value at
December 31, 2012
Balance Sheet
Location
Fair value at
December 31, 2011
Derivative liabilities not designated as hedging
instruments
Other accrued liabilities
$
(1,616
) Other accrued liabilities
$
(654
)
Derivative liabilities designated as hedging
instruments
Other accrued liabilities
(3
)
Other accrued liabilities
(69
)
Total
$
(1,619
)
$
(723
)