Oracle 2009 Annual Report Download - page 119

Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2010
support contracts and hardware systems support contracts are typically billed on a per annum basis in advance and revenues are recognized ratably over the
support periods. Deferred services revenues include prepayments for consulting, On Demand and education services. Revenue for these services is recognized as
the services are performed. Deferred new software license revenues typically result from undelivered products or specified enhancements, customer specific
acceptance provisions, software license transactions that cannot be segmented from consulting services, amongst other reasons. Deferred hardware systems
product revenues typically result from sales to customers, including channel partners and resellers, where revenue recognition criteria have not been met,
transactions involving customer specific acceptance provisions or transactions that cannot be segmented from consulting services.
In connection with the purchase price allocations related to our acquisitions, we have estimated the fair values of the support obligations assumed. The estimated
fair values of the support obligations assumed were determined using a cost build-up approach. The cost build-up approach determines fair value by estimating
the costs relating to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we
would be required to pay a third party to assume the support obligations. These fair value adjustments reduce the revenues recognized over the support contract
term of our acquired contracts.
11. DERIVATIVE FINANCIAL INSTRUMENTS
We adopted the disclosure requirements of ASC 815 during fiscal 2009 and have provided these disclosures prospectively from the year of adoption.
Interest Rate Swap Agreements
Fair Value Hedges
In September 2009, we entered into interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with the
2014 Notes (as defined in Note 8) so that the interest payable on these notes effectively became variable based on LIBOR. The critical terms of the interest rate
swap agreements and the 2014 Notes match, including the notional amounts and maturity dates. Accordingly, we have designated these swap agreements as
qualifying hedging instruments and are accounting for them as fair value hedges pursuant to ASC 815. These transactions are characterized as fair value hedges
for financial accounting purposes because they protect us against changes in the fair value of our fixed rate borrowings due to benchmark interest rate
movements. The changes in fair values of these interest rate swap agreements are recognized as interest expense in our consolidated statements of operations
with the corresponding amounts included in other assets or other non-current liabilities in our consolidated balance sheets. The amount of net gain (loss)
attributable to the risk being hedged is recognized as interest expense in our consolidated statement of operations with the corresponding amount included in
notes payable and other non-current borrowings. The periodic interest settlements, which occur at the same interval as the 2014 Notes, are recorded as interest
expense.
We do not use any interest rate swap agreements for trading purposes.
Cash Flow Hedges
In relation to the variable interest obligations associated with our senior notes that were due and paid in May 2010 and May 2009 (Floating Rate Notes), we
entered into certain variable to fixed interest rate swap agreements to manage the economic effects of the variable interest obligations and designated these
agreements as qualifying cash flow hedges. Upon payment of the Floating Rate Notes in May 2010 and May 2009, we also settled the interest rate swap
agreements associated with these notes and no arrangements were outstanding as of May 31, 2010. The unrealized losses on these interest rate swap agreements
were included in accumulated other comprehensive income and the corresponding fair value payables were included in other current liabilities in our
consolidated balance sheet. The periodic interest settlements, which occurred at the same interval as the Floating Rate Notes were recorded as interest expense.
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Source: ORACLE CORP, 10-K, July 01, 2010 Powered by Morningstar® Document Research℠