eBay 2008 Annual Report Download - page 76

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volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other
factors.
Our primary foreign currency exposures are transaction, economic and translation:
Transaction Exposure
Around the world, we have various 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 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 contracts offset the transaction gains and
losses on certain foreign currency receivables, investments and payables recognized in earnings. As of Decem-
ber 31, 2008, we had outstanding foreign exchange hedge contracts with notional values equivalent to approx-
imately $132.4 million with maturity dates within 34 days. Transaction gains and losses on the contracts and the
assets and liabilities are recognized each period in interest and other income, net included in our consolidated
statement of income.
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 risks. 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 by PayPal. These charges are denominated in Euros and these forecasted inter-
company transactions represent a foreign currency cash flow exposure. We purchase foreign exchange contracts,
generally with maturities of 12 months or less, to reduce the volatility of cash flows related primarily 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. 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/foreign currency exchange rate. Accordingly, 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.
During the year ended December 31, 2008 the realized gains on these hedges were $17.1 million. During the
years ended December 31, 2007 and 2006, the realized gains and losses related to these hedges were not significant.
The notional amount of our economic hedges designated for hedge accounting treatment was $428.9 million and
$515.7 as of December 31, 2008 and 2007, respectively. As of December 31, 2008, net of losses, our unrealized
gains related to economic hedges recorded to accumulated other comprehensive income was $40.5 million. The
loss, net of gains, recorded to accumulated other comprehensive income as of December 31, 2007 was not
significant. We did not have any economic hedges in place as of December 31, 2006.
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 currency
denominated subsidiaries. We may decide to purchase foreign 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.
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 cumulative
effect of foreign exchange rate fluctuations on our consolidated financial position at the end of December 31, 2008,
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