VMware 2013 Annual Report Download - page 80

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
assessment of hedge effectiveness and are recorded in other income (expense), net in the consolidated statements of income as incurred.
VMware generally enters into cash flow hedges semi-annually with maturities of six months or less. As of December 31, 2013 and 2012 , VMware had
forward contracts to purchase foreign currency designated as cash flow hedges with a total notional value of $82 million and $9 million , respectively. The
fair value of these forward contracts was immaterial as of December 31, 2013 and 2012 , and therefore excluded from the fair value tables above. For the
years ended December 31, 2013 and 2012 , all cash flow hedges were considered effective.
Balance Sheet Hedging Activities
In order to manage exposure to foreign currency fluctuations, VMware enters into foreign currency forward contracts to hedge a portion of its net
outstanding monetary assets and liabilities against movements in certain foreign exchange rates. These forward contracts are not designated as hedging
instruments under applicable accounting guidance, and therefore all changes in the fair value of the forward contracts are reported in other income (expense),
net in the consolidated statements of income.
VMware’s foreign currency forward contracts are generally traded on a monthly basis with a typical contractual term of one month. As of December 31,
2013 and 2012 , VMware had outstanding forward contracts with a total notional value of $498 million and $440 million , respectively. The fair value of
these forward contracts was immaterial as of December 31, 2013 and 2012 and therefore excluded from the fair value tables above.
In the years ended December 31, 2013 and 2012 , VMware recognized loss es of $4 million and $10 million
, respectively, on its consolidated statements
of income for its foreign currency forward contracts. In the year ended December 31, 2011 , VMware recognized a gain of $5 million on its consolidated
statement of income for its foreign currency forward contracts.
The net impact of the gains and losses on VMware’s foreign currency forward contracts and the gains and losses associated with the underlying foreign-
currency denominated assets and liabilities resulted in net loss es of $4 million , $2 million and $1 million in the years ended December 31, 2013 , 2012 and
2011 , respectively.
H. Property and Equipment, Net
Property and equipment, net, as of December 31, 2013 and 2012 consisted of the following (table in millions):
Depreciation expense was $141 million , $131 million and $126 million in the years ended December 31, 2013 , 2012 and 2011 , respectively.
In the year ended December 31, 2011 , VMware purchased all of the right, title and interest in a ground lease covering the property and improvements
located adjacent to VMware's existing Palo Alto, California campus for $225 million . Based upon the respective fair values, $74 million of the purchase
price was recorded to property and equipment, net on the consolidated balance sheet representing the estimated fair value of the buildings and site
improvements. The remaining $151 million of the $225 million purchase price was for the fair value of the ground lease and the right to develop additional
square footage on the parcel. The long-term portion of $147 million was recorded to intangible assets, net with the remainder recorded to other current assets
on the consolidated balance sheet.
Concurrent with the closing of the transaction, VMware entered into an amended and restated ground lease for the new property which expires in 2046 .
VMware will possess the title to the interest and buildings during the duration of the lease. Upon termination of the lease, title will revert to the lessor. The
$74 million of buildings and site improvements began depreciating and the $151 million
of intangible assets began amortizing from the date they were placed
into service through 2046 . VMware also entered into an amendment to the ground lease for its existing campus so that the terms of both leases will be 34
years and 11 months from the closing of the purchase agreement. Annual rent payments for the new property were
77
December 31,
2013
2012
Equipment and software
$
752
$
636
Buildings and improvements
584
438
Furniture and fixtures
77
67
Construction in progress
120
98
Total property and equipment
1,533
1,239
Accumulated depreciation
(688
)
(574
)
Total property and equipment, net
$
845
$
665