Twenty-First Century Fox 2005 Annual Report Download - page 80

NEWS CORPORATION
Notes to the Consolidated Financial Statements (continued)
No. 123(R) becomes effective. In addition, the Compensation Committee considered that because these options had exercise prices in excess
of the current market value they were not fully achieving their original objectives of incentive compensation and employee retention, and it
believed that the acceleration would have a positive effect on employee morale.
Derivatives
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” requires every derivative instrument (including certain derivative
instruments embedded in other contracts) to be recorded on the balance sheet at fair value as either an asset or a liability. The statement also
requires that changes in the fair value of recorded derivatives be recognized currently in earnings unless specific hedge accounting criteria are
met.
The Company uses financial instruments designated as cash flow hedges to hedge its limited exposures to foreign currency exchange risks
associated with the costs for producing films abroad. All cash flow hedges are recorded at fair value on the consolidated balance sheet. As of
June 30, 2005 and 2004, the notional amount of foreign exchange forward contracts with foreign currency risk was $77.4 million and $10.8
million, respectively, and the net unrealized gain was approximately $0.5 million and $0.1 million, respectively. The potential loss in fair value for
such financial instruments for a 10% adverse change in quoted foreign currency exchange rates would be approximately $3.5 million and $0.6
million, respectively. The effective changes in fair value of derivatives designated as cash flow hedges are recorded in accumulated other
comprehensive income (loss) with foreign currency translation adjustments. Amounts are reclassified from accumulated other comprehensive
income (loss) when the underlying hedged item is recognized in earnings. If derivatives are not designated as hedges, changes in fair value are
recorded in earnings. (See Note 9 Exchangeable Securities)
Recently issued accounting pronouncements
In September 2004, the Emerging Issues Task Force issued Topic No. D-108, “Use of the Residual Method to Value Acquired Assets Other
Than Goodwill” (“Topic D-108”) which will impact the Company’s carrying value of its acquired FCC licenses. Topic D-108 prohibits the use of
the residual method and precludes companies from reclassifying to goodwill any goodwill that was originally included in the value of FCC
licenses as determined under the residual method of valuation. Pursuant to the provisions of Topic D-108, the Company will utilize a direct
method of valuation for an impairment test under SFAS 142 to be performed as of July 1, 2005, the required date of adopting this new
accounting pronouncement. While the Company has not yet completed the evaluation of the impact of adopting Topic D-108 on its financial
position or results of operations, the Company believes that the change in accounting principle prescribed by Topic D-108 will be material. Topic
D-108 will become effective for the Company in the first quarter of fiscal 2006 and will be reflected as a cumulative effect of an accounting
change.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment.” This standard
will require the cost of employee compensation paid with equity instruments to be measured based on grant-date fair values. That cost will be
recognized over the vesting period. SFAS No. 123(R) will become effective for the Company in the first quarter of fiscal 2006.
In October 2004, the American Jobs Creation Act (the “Act”) was signed into law. The Act includes a temporary incentive for U.S.
multinationals to repatriate foreign earnings at an effective 5.25 percent tax rate. Such repatriations must occur in either an enterprise’s last tax
year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. In
December 2004, the FASB issued a FASB Staff Position, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision
within the American Jobs Creation Act of 2004” (“FSP 109-2”). FSP 109-2 allows companies additional time to evaluate the effect of the Act as
to whether unrepatriated foreign earnings continue to qualify for the SFAS No. 109 exception regarding non-recognition of deferred tax liabilities
and would require explanatory disclosures from those who need the additional time. The Company is currently considering the effects of the
repatriation provisions of the Act. Through June 30, 2005, the Company has not provided deferred taxes on substantially all of the undistributed
earnings of foreign subsidiaries since substantially all such earnings were expected to be permanently invested in foreign operations but has
started an evaluation of the effects of the repatriation provision. Whether the Company will ultimately take advantage of this provision depends on
a number of factors, including reviewing future Congressional or Treasury Department guidance, before a determination can be made. The range
of possible amounts that the Company is considering for repatriation under this provision is up to approximately $500 million. The related
potential range of income tax is up to approximately $30 million.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29”. This
standard amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, by eliminating the exception to fair value measurement for
exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance
– that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. SFAS No. 153 will become
effective for the Company for nonmonetary asset exchanges occurring after the first quarter of fiscal 2006. The Company does not expect the
adoption of SFAS No. 153 to have a material effect on its financial position, results of operation or cash flows.
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