VMware 2015 Annual Report Download - page 49

TableofContents
Uponadoption,entitieswillberequiredtorecognizetheamountofrevenuethattheyexpecttobeentitledtoforthetransferofpromisedgoodsorservicestotheir
customers.TheupdatedstandardiseffectivefortheCompanyinthefirstquarterof2018andpermitstheuseofeithertheretrospectiveorcumulativeeffect
transitionmethod.Earlyadoptionispermitted,butnotearlierthanthefirstquarterof2017.TheCompanyhasnotselectedatransitionmethodandiscurrently
evaluatingtheeffectthatASU2014-09willhaveonitsconsolidatedfinancialstatementsandrelateddisclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Weoperateinforeigncountries,whichexposeustomarketriskassociatedwithforeigncurrencyexchangeratefluctuationsbetweentheU.S.dollarand
variousforeigncurrencies,themostsignificantofwhichistheeuro.
Althoughapproximately70%ofoursalesaredenominatedintheU.S.dollar,wealsoinvoiceandcollectintheeuro,theBritishpound,theJapaneseyen,the
AustraliandollarandtheChineserenminbiintheirrespectiveregions.TheU.SdollaristhefunctionalcurrencyforallVMware'slegalentities.Atthetimeanon-
U.S.dollartransactionisrecorded,thevalueofthetransactionisconvertedintoU.S.dollarsattheexchangerateineffectforthemonthinwhicheachorderis
booked.Asaresult,theamountoflicenseandtotalrevenuesderivedfromthesetransactionswillbeimpactedbyforeigncurrencyexchangefluctuations.
Additionally,aportionofouroperatingexpenses,primarilythecostofpersonneltodelivertechnicalsupportonourproductsandprofessionalservices,sales
andsalessupportandresearchanddevelopment,aredenominatedinforeigncurrencies,primarilythosecurrenciesinwhichwealsoinvoiceandcollect.As
exchangeratesvary,operatingresultsmaydiffermateriallyfromexpectations.
Tomanagetheriskassociatedwithfluctuationsinforeigncurrencyexchangerates,weutilizederivativefinancialinstruments,principallyforeigncurrency
forwardcontracts(“forwardcontracts”),asdescribedbelow.
CashFlowHedgingActivities.Tomitigateourexposuretoforeigncurrencyfluctuationsresultingfromoperatingexpensesdenominatedincertainforeign
currencies,weenterintoforwardcontracts.Weenterintoforwardcontractsannually,whichhavematuritiesoftwelvemonthsorless.AsofDecember31,
2015and2014,wehadforwardcontractstopurchaseapproximately$213millionand$240million,respectively.Thefairvalueoftheseforwardcontracts
wasimmaterialasofDecember31,2015and2014.
ForwardContractsNotDesignatedasHedges.Weenterintoforwardcontractstooffsettheforeigncurrencyriskassociatedwithnetoutstandingmonetary
assetandliabilitypositions.Ourforwardcontractsaretradedonamonthlybasisandtypicallyhaveacontractualtermofonemonth.AsofDecember31,2015and
2014,wehadoutstandingforwardcontractswithatotalnotionalvalueof$721millionand$697million,respectively.Thefairvalueoftheseforwardcontracts
wasimmaterialasofDecember31,2015and2014.
SensitivityAnalysis.Therecanbenoassurancethatourhedgingactivitieswilladequatelyprotectusagainsttherisksassociatedwithforeigncurrency
fluctuations.Ahypotheticaladverseforeigncurrencyexchangeratemovementof10%wouldhaveresultedinapotentiallossof$90millioninfairvalueofour
forwardcontractsasofDecember31,2015.Thissensitivityanalysisdisregardsanyoffsettinggainthatmaybeassociatedwiththeunderlyingforeign-currency
denominatedassetsandliabilitiesthatwehedge.
ThisanalysisalsoassumesaparalleladverseshiftofallforeigncurrencyexchangeratesagainsttheU.S.dollar;however,foreigncurrencyexchangeratesdo
notalwaysmoveinsuchamannerandactualresultsmaydiffermaterially.Wedonot,anddonotintendtousederivativefinancialinstrumentsfortradingor
speculativepurposes.RefertoNoteGtotheconsolidatedfinancialstatementsinPartII,Item8ofthisAnnualReportonForm10-Kforfurtherinformation.
Interest Rate Risk
Fixed Income Securities
OurfixedincomeinvestmentportfolioisdenominatedinU.S.dollarsandconsistsofvariousassetclassesatdifferentmaturities.Ourprimaryobjectivefor
holdingfixedincomesecuritiesistoachieveanappropriateinvestmentreturnconsistentwithpreservingprincipalandmanagingrisk.
SensitivityAnalysis.Atanytime,asharpriseininterestratesorcreditspreadscouldhaveamaterialadverseimpactonthefairvalueofourfixedincome
investmentportfolio.Hypotheticalincreasesininterestratesof50basispointsand100basispointswouldhavedecreasedthefairvalueofourfixedincome
investmentportfolioasofDecember31,2015by$35millionand$70million,respectively.Hypotheticaldecreasesininterestratesof50basispointsand100basis
pointswouldhaveincreasedthefairvalueofourfixedincomeinvestmentportfolioasofDecember31,2015by$35millionand$67million,respectively.
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