eBay 2005 Annual Report Download - page 74

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factors. In addition, at December 31, 2005, we held balances in cash, cash equivalents and investments outside
the U.S. totaling approximately $0.8 billion.
During 2005, the U.S. dollar weakened against most of the foreign currencies listed above. Using the
weighted-average foreign currency exchange rates from 2004, our net revenues for 2005 would have been
lower than reported using the actual exchange rates for 2005 by approximately $12.0 million, of which
$6.7 million and $5.3 million relate to our International Marketplaces and Payments segments, respectively. In
addition, if 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.
Transaction Exposure:
As of December 31, 2005, we had outstanding forward foreign exchange hedge contracts with notional
values equivalent to approximately $151.5 million with maturity dates within 31 days. The hedge contracts are
used to offset changes in the functional currency value of assets and liabilities denominated in foreign
currencies as a result of currency fluctuations. Transaction gains and losses on the contracts and the assets and
liabilities are recognized each period in our consolidated statement of income.
Translation Exposure:
Foreign exchange rate fluctuations may adversely impact our consolidated financial position as well as
our consolidated results of operations. Foreign exchange rate fluctuations may adversely impact our financial
position as the assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our
consolidated balance sheet. The effect of foreign exchange rate fluctuations on our consolidated financial
position for the year ended December 31, 2005, was a net translation loss of approximately $140.5 million.
This loss is recognized as an adjustment to stockholders' equity through accumulated other comprehensive
income. Additionally, foreign exchange rate fluctuations may adversely impact our consolidated results of
operations as exchange rate fluctuations on transactions denominated in currencies other than our functional
currencies result in gains and losses that are reflected in our consolidated statement of income.
We consolidate the earnings of our international subsidiaries by converting them into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52 ""Foreign Currency Translation''
(FAS 52). Such earnings will fluctuate when there is a change in foreign currency exchange rates. From time
to time, we enter into transactions to hedge portions of our foreign currency denominated earnings translation
exposure using both foreign currency options and forward contracts. All contracts that hedge translation
exposure mature ratably over the quarter in which they are executed. During the year ended December 31,
2005, the realized gains and losses related to these hedges were not significant.
Economic Exposure:
We currently charge our international subsidiaries on a monthly basis for their use of intellectual property
and technology and for certain corporate services provided by eBay and PayPal. These charges are
denominated in Euros and these forecasted inter-company transactions represent a foreign currency cash flow
exposure. To reduce foreign exchange risk relating to these forecasted inter-company transactions, we entered
into forward foreign exchange contracts during the year ended December 31, 2005. The objective of the
forward contracts is to ensure that the U.S. dollar-equivalent cash flows are not adversely affected by changes
in the U.S. dollar/Euro exchange rate. Pursuant to Statement of Financial Accounting Standards No. 133
""Accounting for Derivative Instruments and Hedging Activities'' (FAS 133), we expect the hedge of certain
of these forecasted transactions using the forward contracts to be highly effective in offsetting potential
changes in cash flows attributed to a change in the U.S. dollar/Euro exchange rate. Accordingly, we record as
a component of other comprehensive income all unrealized gains and losses related to the forward contracts
that receive hedge accounting treatment. We record all unrealized gains and losses in interest and
accumulated other income, net, related to the forward contracts that do not receive hedge accounting
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