Adobe 2007 Annual Report Download - page 63

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63
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 30, 2007, there were no such net gains or losses recognized in other income relating to hedges of forecasted
transactions that did not occur.
See Note 17 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.
Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
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. 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 30, 2007, the outstanding balance sheet hedging derivatives
had maturities of 90 days or less.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of November 30, 2007. This
sensitivity analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10%
shift in the value of exchange rates relative to the U.S. dollar. For option contracts, the Black-Scholes equation model was
used. For forward contracts, duration modeling was used where hypothetical changes are made to the spot rates of the
currency. A 10% increase in the value of the U.S. dollar (and a corresponding decrease in the value of the hedged foreign
currency asset) would lead to an increase in the fair value of our financial hedging instruments by $34.5 million. Conversely,
a 10% decrease in the value of the U.S. dollar would result in a decrease in the fair value of these financial instruments by
$17.7 million.
We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency
exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.
As a general rule, we do not use financial instruments to hedge local currency denominated operating expenses in
countries where a natural hedge exists. For example, in many countries, revenue from the local currency product licenses
substantially offsets the local currency denominated operating expenses. We assess the need to utilize financial instruments to
hedge currency exposures, primarily related to operating expenses, on an ongoing basis.
We regularly review our hedging program and may as part of this review determine to change our hedging program.
See Note 17 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.
Long-Term Investments
Long-term investments include both equity holdings in publicly traded companies as well as investments in several
privately-held companies. We have a policy in place to review our long-term investments on a regular basis to evaluate
whether or not a security has experienced an other-than-temporary decline in fair value.
Our policy includes, but is not limited to, reviewing each company’ s cash position, financing needs, earnings and
revenue outlook, operational performance, stock price performance over the past six months, liquidity, management and
ownership changes and competition. The evaluation of privately-held companies is based on information that we request
from these companies which is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such,
the basis for these evaluations is subject to the timing and accuracy of the data received from these companies. If we believe
the carrying value of our investment is in excess of fair value, it is our policy to write down these long-term investments to
fair value and record the related write-down in our consolidated statements of income.
We are exposed to equity price risk on our portfolio of marketable equity securities. As of November 30, 2007, our total
equity holdings in publicly traded companies were valued at $20.8 million compared to $11.9 million at December 1, 2006.
The increase was due to the change in the fair market value of our equity holdings during fiscal 2007. See Note 6 for
information regarding our limited partnership interest in Adobe Ventures.