VMware 2015 Annual Report Download - page 76

TableofContents
VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMwareoffersadeferredcompensationplanforeligibleemployeesthatallowsparticipantstodeferpaymentforpartoralloftheircompensation.Thenet
impacttotheconsolidatedstatementsofincomeisnotmaterialsincechangesinthefairvalueoftheassetssubstantiallyoffsetchangesinthefairvalueofthe
liabilities.Assuch,assetsandliabilitiesassociatedwiththisplanhavenotbeenincludedintheabovetables.Assetsandliabilitiesassociatedwiththisplanwere
bothapproximately$20millionand$8millionasofDecember31,2015and2014,respectively,andareincludedinotherassetsandotherliabilitiesonthe
consolidatedbalancesheets.
Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
VMwareevaluatedthestrategicinvestmentsinitsportfolioaccountedforunderthecostmethodtoassesswhetheranyofitsstrategicinvestmentswereother-
than-temporarilyimpaired.VMwareusesLevel3inputsaspartofitsimpairmentanalysis,including,pre-andpost-moneyvaluationsofrecentfinancingevents
andtheimpactofthoseonitsfullydilutedownershippercentages,aswellasotheravailableinformationregardingtheissuer’shistoricalandforecasted
performance.TheestimatedfairvalueoftheseinvestmentsisconsideredinVMware’simpairmentreviewifanyeventsorchangesincircumstancesoccurthat
mighthaveasignificantadverseeffectontheirvalue.
DuringtheyearsendedDecember31,2015and2013,VMwarerecognizedchargesofapproximately$5millionand$13million,respectively,asaresultof
determiningthatcertainstrategicinvestmentswereconsideredtobeother-than-temporarilyimpaired.Therewasnoimpairmentchargeduringtheyearended
December31,2014.AllotherrealizedgainsandlossesoninvestmentsduringtheyearsendedDecember31,2015,2014and2013werenotmaterial.Strategic
investmentsareincludedinotherassets,netontheconsolidatedbalancesheets.ThecarryingvalueofVMware’sstrategicinvestmentsaccountedforunderthecost
methodwas$103millionand$110millionasofDecember31,2015and2014,respectively.
G. Derivatives and Hedging Activities
VMwareconductsbusinessonaglobalbasisinmultipleforeigncurrencies,subjectingtheCompanytoforeigncurrencyrisk.Tomitigatethisrisk,VMware
utilizeshedgingcontractsasdescribedbelow,whichpotentiallyexposetheCompanytocreditrisktotheextentthatthecounterpartiesmaybeunabletomeetthe
termsoftheagreement.VMwaremanagescounterpartyriskbyseekingcounterpartiesofhighcreditquality,bymonitoringcreditratingsandcreditspreadsof,and
otherrelevantpublicinformationaboutitscounterparties.VMwaredoesnot,anddoesnotintendto,usederivativeinstrumentsfortradingorspeculativepurposes.
Cash Flow Hedges
Tomitigateitsexposuretoforeigncurrencyfluctuationsresultingfromoperatingexpensesdenominatedincertainforeigncurrencies,VMwareentersinto
forwardcontracts.TheCompanydesignatestheseforwardcontractsascashflowhedginginstrumentsastheaccountingcriteriaforsuchdesignationhavebeen
met.Therefore,theeffectiveportionofgainsorlossesresultingfromchangesinthefairvalueofthesehedgesisinitiallyreportedinaccumulatedother
comprehensiveincome(loss)ontheconsolidatedbalancesheetsandissubsequentlyreclassifiedtotherelatedoperatingexpenselineitemontheconsolidated
statementsofincomeinthesameperiodthattheunderlyingexpensesareincurred.DuringtheyearsendedDecember31,2015,2014and2013theeffective
portionofgainsorlossesreclassifiedtotheconsolidatedstatementsofincomewasnotmaterial.Interestchargesor“forwardpoints”onVMware’sforward
contractsareexcludedfromtheassessmentofhedgeeffectivenessandarerecordedinotherincome(expense),netontheconsolidatedstatementsofincomeas
incurred.
VMwareentersintoforwardcontractsannually,whichhavematuritiesoftwelvemonthsorless.AsofDecember31,2015and2014,VMwarehadforward
contractsdesignatedascashflowhedgeswithatotalnotionalvalueof$213millionand$240million,respectively.Thenotionalvaluerepresentsthegross
amountofforeigncurrencythatwillbeboughtorsolduponmaturityoftheforwardcontract.
DuringtheyearsendedDecember31,2015and2014,allcashflowhedgeswereconsideredeffective.
Forward Contracts Not Designated as Hedges
VMwarehasestablishedaprogramthatutilizesforwardcontractstooffsettheforeigncurrencyriskassociatedwithnetoutstandingmonetaryassetand
liabilitypositions.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ontheconsolidatedstatementsofincome.
VMwareentersintoforwardcontractsonamonthlybasis,whichtypicallyhaveacontractualtermofonemonth.AsofDecember31,2015and2014,
VMwarehadoutstandingforwardcontractswithatotalnotionalvalueof$721millionand$697million,respectively.Thenotionalvaluerepresentsthegross
amountofforeigncurrencythatwillbeboughtorsolduponmaturityoftheforwardcontract.
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