eBay 2005 Annual Report Download - page 65

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the weighted-average foreign currency exchange rates from 2004 were applied to our cost of revenues and
operating expenses for 2005, these costs of revenues and operating expenses would have been lower in total
than reported using the actual exchange rates for 2005 by approximately $5.6 million. The majority of this
impact relates to the relative strength of the Euro against the U.S. dollar.
We expect our international operations will continue to grow in significance as we develop and deploy our
global marketplaces and global payments platform. As a result, the impact of foreign currency fluctuations in
future periods could become more significant and may have a negative impact on our consolidated net
revenues and net income in the event the U.S. dollar strengthens relative to other currencies. See the
information in Item 7A under ""Foreign Currency Risk'' for additional discussion of the impact of foreign
currency translation and related hedging activities.
Foreign Exchange Hedging Policy
We are a rapidly growing company, with an increasing proportion of our operations outside the United
States. Accordingly, our foreign currency exposures have increased substantially and are expected to continue
to grow. The objective of our foreign exchange exposure management program is to identify material foreign
currency exposures and to manage these exposures to minimize the potential effects of currency fluctuations
on our reported consolidated cash flow, and results of operations.
Our primary foreign currency exposures are transaction, economic and translation:
Transaction Exposure: Around the world, we have certain assets and liabilities, primarily receivables,
investments and accounts payable (including inter-company transactions) that are denominated in currencies
other than the relevant entity's functional currency. In certain circumstances, changes in the functional
currency value of these assets and liabilities create fluctuations in our reported consolidated financial position,
results of operations and cash flows. We may enter into foreign exchange forward contracts or other
instruments to minimize the short-term foreign currency fluctuations on such assets and liabilities. The gains
and losses on the foreign exchange forward contracts offset the transaction gains and losses on certain foreign
currency receivables, investments and payables recognized in earnings.
Economic Exposure: We also have anticipated and unrecognized future cash flows, including revenues
and expenses, denominated in currencies other than the relevant entity's functional currency. Our primary
economic exposures include future royalty receivables, customer collections, and vendor payments. Changes in
the relevant entity's functional currency value will cause fluctuations in the cash flows we expect to receive
when these cash flows are realized or settled. We may enter into foreign exchange forward contracts or other
derivatives to hedge the value of a portion of these cash flows. We account for these foreign exchange
contracts as cash flow hedges. The effective portion of the derivative's gain or loss is initially reported as a
component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings
when the transaction is settled.
Earnings Translation Exposure: As our international operations grow, fluctuations in the foreign
currencies create volatility in our reported results of operations because we are required to consolidate the
results of operations of our foreign denominated subsidiaries. We may decide to purchase forward exchange
contracts or other instruments to offset the earnings impact of currency fluctuations. Such contracts will be
marked-to-market on a monthly basis and any unrealized gain or loss will be recorded in interest and other
income, net.
Employee Stock Options
We continue to believe that employee stock options represent an appropriate and essential component of
our overall compensation program. We grant options to substantially all employees and believe that this broad-
based program helps us to attract, motivate, and retain high quality employees, to the ultimate benefit of our
stockholders. Stock options granted during the year ended December 31, 2005, net of cancellations,
represented approximately 2% of our total common stock outstanding as of December 31, 2005. This
represented a decrease from the approximately 3% of total common stock outstanding as of December 31,
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