Adobe 2000 Annual Report Download - page 57

hedge accounting. We do not expect the adoption of SFAS 133 to result in any material
transition adjustment to earnings in the first quarter of fiscal 2001.
We use option and forward foreign exchange contracts to hedge certain operational
(“cash flow” hedge) exposures resulting from changes in foreign currency exchange rates.
Such exposures result from portions of our revenues that are denominated in currencies
other than the U.S. dollar (“USD”), primarily the Japanese yen and the euro. We enter
into these foreign exchange contracts to hedge anticipated product sales and receivables
in the normal course of business, and accordingly, they are not speculative in nature.
Changes in the fair value of the derivative instruments designated as cash flow hedges of
anticipated non-USD sales will be recorded in accumulated other comprehensive income
(loss) until the revenue is recognized. Upon revenue recognition, the related gain or loss
on the cash flow hedge will be reclassified to revenue. In the event the underlying fore-
casted transaction does not occur, or it becomes probable that it will not occur, we would
reclassify the gain or loss on the related cash flow hedge from accumulated other
comprehensive income (loss) to other income on the consolidated income statement at
that time. Since the critical terms of the hedging instruments are the same as the under-
lying forecasted transaction, the changes in fair value of the derivatives are highly
effective in offsetting changes in the expected cash flows from the forecasted transaction.
We will record any ineffective portion of the hedging instruments directly as other
income on the consolidated income statement.
Furthermore, we continue to hedge our net recognized foreign currency assets and liabili-
ties with forward foreign exchange contracts to reduce the risk that our earnings and cash
flows will be adversely affected by changes in foreign currency exchange rates. These
derivative instruments hedge assets and liabilities that are denominated in foreign
currencies and are marked to market through other income. Therefore, these contracts
do not need to be designated hedges under SFAS 133. These derivative instruments do
not subject us to material balance sheet risk due to exchange rate movements because
gains and losses on these derivatives offset losses and gains on the assets and liabilities
being hedged. The forward foreign exchange contracts entered into by us had maturities
of ninety days or less.
We also have a policy that allows us to hedge our equity holdings in publicly traded com-
panies. From time to time, we have entered into forward contracts to sell portions of our
equity holdings in future periods. We account for these forward contracts at fair market
value, offsetting changes in the fair market value, of the equities being hedged.
Put Warrants and Call Options We utilize put warrants and call options (“puts and calls”)
to facilitate the repurchase of our common stock. The puts and calls permit, at our 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.
Stock Split Adobe’s Board of Directors approved a two-for-one stock split in the form of a
stock dividend of our common stock to stockholders of record on October 2, 2000
effected October 24, 2000. All share and per share amounts referred to in the consolidated
financial statements have been adjusted to reflect this stock split.
Comprehensive Income Statement of Financial Accounting Standards No. 130 (“SFAS
130”), “Reporting Comprehensive Income,” establishes standards for the reporting and
display of comprehensive income and its components in the financial statements. Items
of comprehensive income (loss) that we currently report are unrealized gains and losses
on marketable securities categorized as available-for-sale and foreign currency translation
adjustments. We display comprehensive income and its components on our Consolidated
Statements of Stockholders’ Equity and Other Comprehensive Income.
Recent Accounting Pronouncements In June 1999, the FASB issued SFAS 133, “Accounting
for Derivative Instruments and Hedging Activities,” as amended by SFAS 137,
“Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective
Date of FASB Statement No. 133,” and SFAS 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities.” We adopted SFAS 133 beginning December
2, 2000. SFAS 133 establishes accounting and reporting standards for derivative financial