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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
100
A reconciliation of the beginning and ending balances for investments of limited partnership using significant
unobservable inputs (Level 3) as of December 3, 2010 and November 27, 2009 was as follows (in thousands):
Balance as of November 28, 2008 ......................................................................................................................
$
38,753
Purchases and sales of investments, net ..............................................................................................................
1,921
Unrealized net investment losses included in earnings .......................................................................................
(3,553
)
Balance as of November 27, 2009 ......................................................................................................................
$
37,121
Purchases and sales of investments, net ..............................................................................................................
(18,788
)
Unrealized net investment losses included in earnings .......................................................................................
(7,919
)
Transfer to cost method investments ..................................................................................................................
(8,480
)
Transfer to marketable equity securities (Level 1) ............................................................................................
(1,934
)
Balance as of December 3, 2010.........................................................................................................................
$
—
We also have direct investments in privately-held companies accounted for under the cost method, which are
periodically assessed for other-than-temporary impairment. If we determine that an other-than-temporary impairment has
occurred, we write-down the investment to its fair value. We estimate fair value of our cost method investments considering
available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts,
recent operational performance and any other readily available market data. During fiscal 2010 and 2009, we determined that
certain of our direct cost method investments were other-than-temporarily impaired which resulted in charges of $2.3 million
and $13.9 million, respectively, which were included in investment gains (losses), net in our Consolidated Statements of
Income.
See Note 8 for further information regarding our limited partnership interest in Adobe Ventures and our cost method
investments.
NOTE 5. DERIVATIVE AND HEDGING ACTIVITIES
Hedge Accounting
We recognize derivative instruments and hedging activities as either assets or liabilities in our Consolidated Balance
Sheets 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.
Economic Hedging—Hedges of Forecasted Transactions
In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. Therefore, we are
subject to exposure from movements in foreign currency rates. We may use foreign exchange option contracts or forward
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 any contract is twelve months. We enter into these foreign exchange contracts to hedge a portion of our
forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative
in nature.
We recognize derivative instruments from 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. 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 in our Consolidated Balance Sheets, 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 to interest and other income, net
in our Consolidated Statements of Income at that time. For fiscal 2010, 2009 and 2008 there were no such gains or losses
recognized in interest and other income, net relating to hedges of forecasted transactions that did not occur.
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 interest and other income, net on our Consolidated Statements of Income.
The net gain (loss) recognized in interest and other income, net for cash flow hedges due to hedge ineffectiveness was