eBay 2008 Annual Report Download - page 103

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Equity and cost method investments
We have certain investments accounted for using the equity and cost methods of accounting totaling
$112.9 million in 2007 and $100.7 million in 2008. The total of these investments, including identifiable intangible
assets, deferred tax liabilities and goodwill, are classified on our balance sheet as long-term investments. Our
consolidated results of operations include, as a component of other income, our share of the net income or loss of the
equity method investments together with amortization expense relating to acquired intangible assets. Our share of
the results of investees’ results of operations is not significant for any period presented.
Note 6 — Derivative Instruments:
We recognize all derivative instruments on the balance sheet at fair value. Changes in the fair value (i.e., gains
or losses) of the derivatives are recorded each period in the consolidated statement of income or accumulated other
comprehensive income (loss). For derivative instruments that are designated and qualify 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 the financial statements line item in which the
hedged item is recorded in the same period the forecasted transaction affects earnings.
Transaction Exposure
As of December 31, 2008, we had outstanding foreign exchange hedge contracts with notional values
equivalent to approximately $132.4 million with maturity dates within 34 days. The hedge contracts are used to
offset changes in the value of assets and liabilities denominated in foreign currencies which differ from the
functional currency of the entity. Transaction gains and losses on the contracts and the assets and liabilities are
recognized each period in interest and other income, net.
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 foreign exchange
contracts. All contracts that hedge translation exposure mature ratably over the quarter in which they are executed.
Unrealized translation gains and losses are recorded as a component of accumulated other comprehensive income.
During the year ended December 31, 2008, the realized gains related to these hedges was approximately
$26.3 million. During the years ended December 31, 2006 and 2007, the realized gains and losses related to
these hedges were not significant.
Economic Exposure
We transact business in various foreign currencies and have significant international revenues as well as costs
denominated in foreign currencies, subjecting us to foreign currency risk. In addition, we 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 in the U.S. These charges are denominated in Euros and these forecasted
inter-company transactions represent a foreign currency cash flow exposure. We purchase foreign currency
exchange contracts, generally with maturities of 12 months or less, to reduce the volatility of cash flows primarily
related to forecasted revenue and intercompany transactions denominated in certain foreign currencies. The
objective of the foreign exchange contracts is to better ensure that the U.S. dollar-equivalent cash flows are not
adversely affected by changes in the U.S. dollar/foreign currency exchange rate. 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/foreign currency exchange rate. Accordingly, we record as a component of accumulated
other comprehensive income all unrealized gains and losses related to the foreign exchange contracts that receive
95
eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)