Adobe 2002 Annual Report Download - page 134

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103
Note 16. Financial Instruments
Fair Value of Financial Instruments
As of November 29, 2002, our cash equivalents, short-term investments, and marketable equity securities, are
carried at fair value, based on quoted market prices for these or similar investments. Our total cash equivalents,
short-term investments, and marketable equity securities had a cost basis of $589.3 million and a fair market value
of $595.8 million. Our portfolio of marketable equity securities included in our short-term investments had a cost
basis of $11.1 million and a fair market value of $14.1 million. (For further information, see Note 3)
Our portfolio of investments included in Other Assets at November 29, 2002, which includes our direct
investments, as well as indirect investments through Adobe Ventures, had an estimated fair market value of $35.6
million. (For further information, see Note 6)
Foreign Currency Hedging Instruments
We transact business in various foreign currencies, primarily in certain European countries and Japan.
Accordingly, we are subject to exposure from movements in foreign currency exchange rates. This exposure is
primarily related to revenue from yen-denominated licenses in Japan and euro-denominated licenses in certain
European countries.
Our Japanese operating expenses are in yen, and our European operating expenses are primarily in euro, which
mitigates a portion of the exposure related to yen and euro denominated licenses. In addition, we hedge firmly
committed transactions using forward contracts. These contracts do subject us to risk of accounting gains and losses;
however, the gains and losses on these contracts typically offset or partially offset gains and losses on the assets,
liabilities, and transactions being hedged. We also hedge a percentage of forecasted international revenue with
forward and purchased option contracts. Our revenue hedging policy is designed to reduce the negative impact on
our forecasted revenue due to foreign currency exchange rate movements. As of November 29, 2002, all contracts
were set to expire at various times through June 2003. The bank counterparties in these contracts expose us to credit-
related losses in the event of their nonperformance. However, to mitigate that risk we only contract with high quality
counterparties with specific minimum rating requirements. In addition, our hedging policy establishes maximum
limits for each counterparty.
Economic Hedging – Hedges of Forecasted Transactions
We use option and forward foreign exchange contracts to hedge certain operational ("cash flow") exposures
resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value,
may have a duration between one to twelve months. Such cash flow exposures result from portions of our forecasted
revenues 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 forecasted product licensing revenue in the normal course
of business, and accordingly, they are not speculative in nature.
We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income
(loss), until the forecasted transaction occurs. The time value of purchased derivative instruments is deemed to be
ineffective and is recorded in other income over the life of the contract. When the forecasted transaction occurs, we
reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted
transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related
cash flow hedge from accumulated other comprehensive income (loss) to interest and other income (loss) on the
consolidated statement of income at that time. For the fiscal year ended November 29, 2002, there were no such net
gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur.
The critical terms of the cash flow hedging instruments are the same as the underlying forecasted transactions.
The changes in fair value of the derivatives are intended to offset changes in the expected cash flows from the
forecasted transactions. We record any ineffective portion of the hedging instruments in other income on the
consolidated statement of income.