Adobe 2010 Annual Report Download - page 92

ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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We mitigate concentration of risk related to foreign currency hedges through a policy that establishes counterparty
limits. 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 who meet our minimum requirements under our
counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for each counterparty. We
monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment of
counterparty risk, we will adjust our exposure to various counterparties.
The aggregate fair value of derivative instruments in net asset positions as of December 3, 2010 and November 27,
2009 was $18.8 million and $4.3 million, respectively. These amounts represent the maximum exposure to loss at the
reporting date as a result of all of the counterparties failing to perform as contracted. These exposures could be reduced by up
to $1.9 million and $1.6 million, respectively of liabilities included in master netting arrangements with those same
counterparties.
Credit risk in receivables is limited to OEMs, dealers and distributors of hardware and software products to the retail
market, and to customers to whom we license software directly. We are also experiencing elevated delinquency and bad debt
write-offs related to our pre-acquisition receivables. A credit review is completed for our new distributors, dealers and
OEMs. We also perform ongoing credit evaluations of our customers’ financial condition and require letters of credit or other
guarantees, whenever deemed necessary. The credit limit given to the customer is based on our risk assessment of their
ability to pay, country risk and other factors and is not contingent on the resale of the product or on the collection of
payments from their customers. We also purchase credit insurance to mitigate credit risk in some foreign markets where we
believe it is warranted. If we license our software to a customer where we have a reason to believe the customer’ s ability to
pay is not probable, due to country risk or credit risk, we will not recognize the revenue. We will revert to recognizing the
revenue on a cash basis, assuming all other criteria for revenue recognition has been met.
See Note 19 for information regarding our significant customers.
We derive a significant portion of our OEM PostScript and Other licensing revenue from a small number of OEMs. Our
OEMs on occasion seek to renegotiate their royalty arrangements. We evaluate these requests on a case-by-case basis. If an
agreement is not reached, a customer may decide to pursue other options, which could result in lower licensing revenue for
us.
Recent Accounting Pronouncements
Fair Value Measurements
In January 2010, the FASB issued new accounting guidance expanding disclosures about fair value measurements by
adding disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and
inputs used, the activity in Level 3 fair value measurements and the transfers between Levels 1, 2 and 3. The new disclosures
and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosure requirements related to the activity in Level 3 fair value measurements. Those
disclosure requirements are effective for fiscal years beginning after December 15, 2010 and for interim periods within those
fiscal years. We adopted the new disclosures in the second quarter of fiscal 2010, which included changing the description of
certain asset classes in the tables in Notes 3 and 4 to conform with the requirements of the new guidance. We will adopt the
Level 3 requirements in the first quarter of fiscal 2012. Since the adoption of the new standards only required additional
disclosure, the adoption did not have an impact on our consolidated financial position, results of operations or cash flows.
Variable Interest Entities
In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity.
These new standards amend the evaluation criteria to identify the primary beneficiary of a variable interest entity and requires
ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The provisions of the
new standards were effective for annual reporting periods beginning after November 15, 2009 and interim periods within
those fiscal years. These standards were effective for us beginning in the first quarter of fiscal 2010. The adoption of the new
standards did not have an impact on our consolidated financial position, results of operations or cash flows.
Intangible Assets Useful Lives
In April 2008, the FASB issued new standards which provided guidance on how to determine the useful life of
intangible assets by amending the factors an entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets. This new guidance applies prospectively to intangible assets that