Oracle 2014 Annual Report Download - page 122

Table of Contents
ORACLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2015
as the services are performed. Deferred cloud software as a service (SaaS), platform as a service (PaaS) and infrastructure as a service (IaaS)
revenues generally result from customer payments made in advance for our cloud-based offerings that are recognized over the corresponding
contractual term. Deferred new software licenses revenues typically result from undelivered products or specified enhancements, customer
specific acceptance provisions, customer payments made in advance for time-based license arrangements and software license transactions that
cannot be separated from undelivered consulting or other services.
In connection with our acquisitions, we have estimated the fair values of the cloud SaaS and PaaS, software license updates and product support,
and hardware systems support obligations, among others, assumed from our acquired companies. We generally have estimated the fair values of
these obligations assumed using a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related 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 these acquired obligations. These aforementioned fair value adjustments recorded for
obligations assumed from our acquisitions reduced the cloud SaaS and PaaS, software license updates and product support and hardware systems
support deferred revenues balances that we recorded as liabilities from these acquisitions and also reduced the resulting revenues that we
recognized or will recognize over the terms of the acquired obligations during the post-combination periods.
Fair Value Hedges — Interest Rate Swap Agreements
In July 2014, we entered into certain interest rate swap agreements that have the economic effect of modifying the fixed interest obligations
associated with our 2019 Notes and 2021 Notes so that the interest payable on these senior notes effectively became variable based on LIBOR.
In July 2013, we entered into certain interest rate swap agreements that have the economic effect of modifying the fixed interest obligations
associated with our January 2019 Notes so that the interest payable on these senior notes effectively became variable based on LIBOR. The
critical terms of the interest rate swap agreements match the critical terms of the 2019 Notes, 2021 Notes and the January 2019 Notes that the
interest rate swap agreements pertain to, including the notional amounts and maturity dates.
We have designated the aforementioned interest rate 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 values of certain 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, non-current. The periodic interest settlements for the interest rate swap agreements for the 2019 Notes, 2021
Notes and the January 2019 Notes are recorded as interest expense and are included as a part of cash flows from operating activities.
In July 2014, we settled the fixed to variable interest rate swap agreements associated with the 2014 Notes. We do not use any interest rate swap
agreements for trading purposes.
Cash Flow Hedges — Cross Currency Swap Agreements
In connection with the issuance of our January 2021 Notes, we entered into certain cross-currency swap agreements to manage the related
foreign currency exchange risk by effectively converting the fixed-rate, Euro denominated January 2021 Notes, including the annual interest
payments and the payment of principal at maturity, to fixed-rate, U.S. Dollar denominated debt. The economic effect of the swap agreements
was to eliminate the uncertainty of the cash flows in U.S. Dollars associated with the January 2021 Notes by fixing the
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11. DERIVATIVE FINANCIAL INSTRUMENTS