Adobe 1999 Annual Report Download - page 54

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Continued)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
distributors is subject to agreements allowing limited rights of return, rebates, and price protection. The
Company provides for estimated future returns, and price protection when given, at the time the related
revenue is recorded.
Licensing revenue, primarily royalties, is recorded when OEM customers ship products incorporating
Adobe software, provided collection of such revenue is probable. The Company has no remaining
obligation in relation to such licensing revenue.
Deferred revenue includes customer advances under OEM licensing agreements. Additionally, main-
tenance revenue for application products is deferred and recognized ratably over the term of the contract,
generally twelve months.
Direct costs
Direct costs include product packaging, third-party royalties, amortization related to localization costs
and acquired technologies, and reserves for excess and obsolete inventory.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. A valuation allowance is recorded to reduce tax assets to an amount whose realization
is more likely than not.
Foreign currency hedging instruments
The Company enters into foreign exchange contracts to hedge its foreign currency risks. Such
contracts must be effective at reducing the foreign currency risk associated with the underlying transaction
being hedged and must be designated as a hedge at the inception of the contract. The Company, as a
matter of policy, does not engage in speculative transactions.
The Company currently uses forward contracts as hedges of firmly committed transactions. For these
contracts, mark-to-market gains and losses are recognized as other income or expense in the current
period, generally consistent with the period in which the gain or loss of the underlying transaction is
recognized. As of December 3, 1999, the majority of all forward foreign currency contracts entered into by
the Company had maturities of 90 days or less.
Put warrants and call options
The Company utilizes put warrants and call options (‘‘puts and calls’’) to facilitate the repurchase of
its common stock. The puts and calls permit, at the Company’s option, physical delivery or net share
settlement equal to the difference between the exercise price and the value of the option as determined by
the contract. Accordingly, in-the-money put warrants do not result in a liability on the balance sheet.
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