eBay 2010 Annual Report Download - page 102

eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair value of financial instruments
Our financial instruments, including cash, cash equivalents, accounts receivable, loans and interest
receivable, funds receivable, customer accounts, short-term debt, accounts payable, funds payable and amounts
due to customers are carried at cost, which approximates their fair value because of the short-term maturity of
these instruments.
Foreign currency
Most of our foreign subsidiaries use the local currency of their respective countries as their functional
currency. Assets and liabilities are translated at exchange rates prevailing at the balance sheet dates. Revenues,
costs and expenses are translated into U.S. dollars using daily exchange rates if the transaction is recorded in our
accounting systems on a daily basis, otherwise using average exchange rates for the period. Gains and losses
resulting from the translation of our consolidated balance sheet are recorded as a component of accumulated
other comprehensive income.
Realized gains and losses from foreign currency transactions are recognized as interest and other income
(expense), net.
Derivative instruments
We have significant international revenues as well as costs denominated in foreign currencies, subjecting us to
foreign currency risk. We purchase foreign currency exchange contracts that qualify as cash flow hedges, generally
with maturities of 15 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue
and intercompany transactions denominated in certain foreign currencies. All outstanding designated derivatives
that qualify for hedge accounting are recognized on the balance sheet at fair value. The effective portion of the
designated derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income
and is subsequently reclassified into the financial statement line item in which the hedged item is recorded in the
same period the forecasted transaction affects earnings. We also economically hedge our exposure to foreign
currency denominated monetary assets and liabilities with foreign currency contracts. The gains and losses on the
foreign exchange contracts economically offset transaction gains and losses on certain foreign currency
denominated monetary assets and liabilities recognized in earnings. Accordingly, these outstanding non-designated
derivatives are recognized on the balance sheet at fair value and changes in fair value from these contracts are
recorded in interest and other income (expense), net, in the consolidated statement of income. Our derivatives
program is not designed or operated for trading or speculative purposes.
Our derivative instruments expose us to credit risk to the extent that our counterparties may be unable to
meet the terms of the agreements. We seek to mitigate this risk by limiting our counterparties to major financial
institutions and by spreading the risk across several major financial institutions. In addition, the potential risk of
loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. See
“Note 9 — Derivative Instruments” for additional information related to our derivative instruments.
Concentration of credit risk
Our cash, cash equivalents, accounts receivable, loans and interest receivable, funds receivable and
customer accounts are potentially subject to concentration of credit risk. Cash, cash equivalents and customer
accounts are placed with financial institutions that management believes are of high credit quality. In addition,
funds receivable are generated with financial institutions or credit card companies that management believes are
of high credit quality. Our accounts receivable are derived from revenue earned from customers located in the
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