Adobe 2004 Annual Report Download - page 91

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91
$221.6 million. As of December 3, 2004, all contracts were set to expire at various times through June
2005. 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 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 maturities between one and 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
December 3, 2004, 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 (loss) on the consolidated statement of income. The time value of purchased derivative
instruments is deemed to be ineffective and is recorded in other income (loss) over the life of the contract.
Net losses on hedges of forecasted transactions were as follows:
Balance Sheet Other Comprehensive
Income (Loss)
December 3, November 28,
2004 2003
Recognized but Unrealized – Open Transactions:
Unrealized net loss remaining in other comprehensive income (loss)....
.
$ — $ (867)
Income Statement Years Ended
December 3
,
2004 November 28
,
2003 November 29
,
2002
Revenue
Other
Income
(Loss) Revenue
Other
Income
(Loss)
Revenue
Other
Income
(Loss)
Realized – Closed Transactions:
Realized net loss reclassified from
other comprehensive income
(loss) to revenue .......................... $ (405) $ ―$ (3,489) $ ―$ (463) $ ―
Realized net loss from the cost of
purchased options and gains or
losses from any ineffective
portion of hedges......................... ― (6,829) ― (5,047) ― (5,251)
Recognized but Unrealized – Open
Transactions:
Unrealized net loss from time value
degradation and any ineffective
portion of hedges......................... ― (2,602) ― (1,078) ― (29)
$ (405) $ (9,431) $ (3,489) $ (6,125) $ (463) $ (5,280)