Adobe 2006 Annual Report Download - page 78

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78
shares, we instituted a stock repurchase program. See Note 12 for information regarding our stock
repurchase program.
Foreign Currency and Other 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 and yen subject us to exposure from movements in
foreign currency exchange rates. We hedge our net recognized foreign currency assets and liabilities with
foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely
affected by changes in foreign currency exchange rates. We use foreign exchange option and forward
contracts to reduce our exposure to foreign currency rate changes on non-functional currency denominated
forecasted product licensing revenue, primarily yen-denominated and euro-denominated revenue.
Adobe accounts for its derivative instruments as either assets or liabilities on the balance sheet and
measures them at fair value. Derivatives that are not defined as hedges in Statement of Financial
Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging
Activities,” must be adjusted to fair value through earnings. As described in Note 16, 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.
Gains and losses from the foreign exchange forward contracts hedging certain balance sheet positions,
primarily non-functional currency denominated assets, such as trade receivables, and liabilities, such as
accounts payable, are recorded each period in other income (expense) in the consolidated statements of
operations. Foreign exchange forward contracts hedging forecasted non-functional currency denominated
forecasted product licensing revenue, are designated as cash flow hedges under SFAS 133, with gains and
losses recorded net of tax, as a component of other comprehensive income in stockholders’ equity and
reclassified into revenue at the time the forecasted transactions occur.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax
expense is recognized for the amount of taxes payable or refundable for the current year. In addition,
deferred tax assets and liabilities are recognized for expected future tax consequences of temporary
differences between the financial reporting and tax bases of assets and liabilities, and for operating losses
and tax credit carryforwards. We record a valuation allowance to reduce deferred tax assets to an amount
for which realization is more likely than not.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS
157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair
value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair
value measurements but rather eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier
adoption is permitted, provided the company has not yet issued financial statements, including for interim
periods, for that fiscal year. We are currently evaluating the impact of SFAS 157, but do not expect the
adoption of SFAS 157 to have a material impact on our consolidated financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans—An Amendment of FASB No. 87, 88, 106 and 132(R)"
("SFAS 158"). SFAS 158 requires that the funded status of defined benefit postretirement plans be
recognized on the company's balance sheet, and changes in the funded status be reflected in comprehensive
income, effective fiscal years ending after December 15, 2006. The standard also requires companies to
measure the funded status of the plan as of the date of its fiscal year-end, effective for fiscal years ending