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89
financial position, cash flows or results of operations could be affected by the resolution of one or more of
such contingencies.
Note 15. Financial Instruments
Fair Value of Financial Instruments
In accordance with Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting
for Derivative Instruments and Hedging Activities,” we recognize derivative instruments and hedging
activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses
resulting from changes in fair value are accounted for depending on the use of the derivative and whether it
is designated and qualifies for hedge accounting.
As of December 2, 2005, 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. For
further information, see Note 3.
Our portfolio of investments in privately held companies, which includes our direct investments, as
well as indirect investments through Adobe Ventures, is included in other assets on our Consolidated
Balance Sheet. For further information, see Note 6.
Foreign Currency Hedging Instruments
We transact business in foreign countries, in U.S. dollars and in various foreign currencies. In Europe
and Japan, transactions that are denominated in euro or yen subject us to exposure from movements in
foreign currency exchange rates. This exposure is primarily related to yen-denominated product and
support revenue in Japan and euro-denominated product and support revenue in certain European countries.
In fiscal 2005, 2004 and 2003, our exposures were 26.4 billion yen, 24.1 billion yen and 21.3 billion yen,
respectively. In fiscal 2005, 2004 and 2003, our exposures were 411.4 million euros, 375.4 million euros
and 274.0 million euros, respectively.
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 product revenue. 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 largely 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 intended
to reduce the negative impact on our forecasted revenue due to foreign currency exchange rate movements.
At December 2, 2005, total outstanding contracts were $339.3 million which included the notional
equivalent of $133.0 million in foreign currency forward exchange contracts, which hedged our balance
sheet exposures, and the notional equivalent of $206.3 million in purchased put option contracts, which
hedged our forecasted revenue. As of December 2, 2005, all contracts were set to expire at various times
through April 2006. 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.
In addition we also have long term investment exposures consisting of the capitalization and retained
earnings in our non-USD functional foreign subsidiaries. For the fiscal years ending December 2, 2005 and
December 3, 2004 this long term investment exposure totaled a notional equivalent of $56.7 million and
$40.1 million, respectively. At this time we do not hedge these long term investment exposures.
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. The maximum original duration
of options and forward foreign exchange contracts is twelve months. Such cash flow exposures result from
portions of our forecasted revenues denominated in currencies other than the U.S. dollar, primarily the