Adobe 2006 Annual Report Download - page 106

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106
Economic Hedging – Hedges of Forecasted Transactions
We use foreign exchange option contracts to hedge certain operational (“cash flow”) exposures
resulting from changes in foreign currency exchange rates. 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. These foreign exchange contracts, carried at fair value, may have maturities between one and
twelve months. The maximum original duration of any option contract is twelve months. 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.
To receive hedge accounting treatment, all hedging relationships are formally documented at the
inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows
on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated
other comprehensive income (loss) until the forecasted transaction occurs.
The following is a summary of the existing gains that are currently included in accumulated other
comprehensive income. These amounts represent the fair value of our cash flow hedge contracts that were
still open as of the periods below.
Gain (Loss) on Hedges of Forecasted Transactions:
Balance Sheet Accumulated
Other Comprehensive
Income (Loss)
December 1, December 2,
2006 2005
Recognized but Unrealized – Open Transactions:
Net unrealized gain remaining in other accumulated comprehensive
income, net of tax...............................................................................
$ 566.8
$ 5,317.1
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, the related hedge gains and losses on the cash flow hedge are reclassified from accumulated
other comprehensive income (loss) to interest and other income (loss) on the consolidated statement of
income at that time. For fiscal 2006 and 2005, there were no such gains or losses recognized in other
income relating to hedges of forecasted transactions that did not occur.
Pursuant to SFAS 133, we evaluate hedge effectiveness at the inception of the hedge prospectively as
well as retrospectively and record any ineffective portion of the hedging instruments in other income (loss)
on the consolidated income statement. The net gain (loss) recognized in other income for cash flow hedges
due to hedge ineffectiveness was insignificant for fiscal 2006 and 2005. The time value of purchased
derivative instruments is recorded in other income (loss).