eBay 2006 Annual Report Download - page 97

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Translation Exposure
We consolidate the earnings of our international subsidiaries by converting them into U.S. dollars in
accordance with Financial Accounting Standards No. 52 “Foreign Currency Translation” (FAS 52). Such earnings
will fluctuate when there is a change in foreign currency exchange rates. We enter into transactions to hedge
portions of our foreign currency denominated earnings translation exposure using either forward exchange
contracts or other instruments. All contracts that hedge translation exposure mature ratably over the quarter in
which they are executed. During the years ended December 31, 2005 and 2006, 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 by 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, 2006. The objective of the forward contracts is to better
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 Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and
Hedging Activities” (FAS 133), we expect the hedge of certain of these forecasted transactions 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 accumulated 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 other income, net, related to the forward contracts that do not receive hedge accounting
treatment pursuant to FAS 133. During the years ended December 31, 2005 and 2006, the realized gains and losses
related to these hedges were not significant. The notional amount of our economic hedges receiving hedge
accounting treatment and the losses, net of gains, recorded to accumulated other comprehensive income as of
December 31, 2005 was $203 million and $200,000, respectively. We did not have any economic hedges in place as
of December 31, 2006.
Note 7 — Balance Sheet Components:
2005 2006
December 31,
(In thousands)
Accounts receivable, net:
Accounts receivable ......................................... $396,373 $476,060
Allowance for doubtful accounts ............................. (62,507) (68,401)
Allowance for authorized credits ............................. (11,078) (14,464)
$322,788 $393,195
93
eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)