Oracle 2012 Annual Report Download - page 80

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Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on
our consolidated financial statements, see Note 1 of Notes to Consolidated Financial Statements included
elsewhere in this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Cash, Cash Equivalents, Marketable Securities and Interest Income Risk
Our bank deposits and money market investments are generally held with a number of large, diverse financial
institutions worldwide, which we believe mitigates certain risks. In addition, we purchase high quality debt security
investments, all of which have maturity dates, if any, within two years from the date of purchase (see a description
of our debt securities held in Notes 3 and 4 of Notes to Consolidated Financial Statements included elsewhere in
this Annual Report and “Liquidity and Capital Resources” above). Therefore, interest rate movements generally do
not materially affect the valuation of our debt security investments. Substantially all of our marketable securities are
designated as available-for-sale. We generally do not use our investments for trading purposes.
Changes in the overall level of interest rates affect the interest income that is generated from our cash, cash
equivalents and marketable securities. For fiscal 2012, total interest income was $231 million with our
investments yielding an average 0.72% on a worldwide basis. The table below presents the fair values of our
cash, cash equivalent and marketable securities and the related weighted average interest rates for our investment
portfolio at May 31, 2012 and 2011.
May 31,
2012 2011
(Dollars in millions) Fair Value
Weighted
Average
Interest
Rate Fair Value
Weighted
Average
Interest
Rate
Cash and cash equivalents .................................. $ 14,955 0.61% $ 16,163 0.61%
Marketable securities ...................................... 15,721 0.80% 12,685 0.68%
Total cash, cash equivalents and marketable securities ........ $ 30,676 0.71% $ 28,848 0.64%
Interest Expense Risk
Our total borrowings were $16.5 billion as of May 31, 2012, all of which were fixed rate borrowings. Future
changes in interest rates and resulting changes in estimated fair values of our borrowings other than our senior
notes due July 2014 (2014 Notes) and short-term borrowings pursuant to our 2012 Credit Agreement would not
impact the interest expense we recognize in our consolidated statements of operations. We have entered into
certain fixed to variable interest rate swap agreements to manage the interest rate and related fair value of our
2014 Notes so that the interest payable on the 2014 Notes effectively became variable based on LIBOR. We do
not use these interest rate swap arrangements or our fixed rate borrowings for trading purposes. We have
designated these swap agreements as qualifying hedging instruments and are accounting for them as fair value
hedges pursuant to ASC 815, Derivatives and Hedging. 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 statements of operations with the corresponding amount included in notes payable and other
non-current borrowings. The periodic interest settlements for the swap agreements, which occur at the same
interval as those per the 2014 Notes, are recorded as interest expense.
By entering into these interest rate swap arrangements, we have assumed risks associated with variable interest
rates based upon LIBOR. Our 2014 Notes had an effective interest rate of 1.39% as of May 31, 2012, after
considering the effects of the aforementioned interest rate swap arrangements. Changes in the overall level of
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