Adobe 2002 Annual Report Download - page 86

Download and view the complete annual report

Please find page 86 of the 2002 Adobe annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 147

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147

55
Derivatives and Financial Instruments
(Item 7a. Quantitative and Qualitative Disclosures About Market Risk)
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. At November 29, 2002, total outstanding
contracts included the equivalent of $72.4 million in foreign currency forward exchange contracts and purchased put
option contracts with a notional value of $65.2 million. 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, 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. 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. The time value of purchased derivative instruments is deemed to be ineffective
and is recorded in other income over the life of the contract.
Balance Sheet Hedging - Hedging of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency assets and liabilities 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
carried at fair value with changes in the fair value recorded as other income (loss). These derivative instruments do
not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these
derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At November 29, 2002,
the outstanding balance sheet hedging derivatives had maturities of 90 days or less.