Adobe 2011 Annual Report Download - page 84

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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.
Taxes Collected from Customers
We net taxes collected from customers against those remitted to government authorities in our financial statements.
Accordingly, taxes collected from customers are not reported as revenue.
Treasury Stock
We account for treasury stock under the cost method. When treasury stock is re-issued at a price higher than its cost, the
difference is recorded as a component of additional paid-in-capital in our Consolidated Balance Sheets. When treasury stock is
re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent that
there are gains to offset the losses. If there are no treasury stock gains in additional paid-in-capital, the losses upon re-issuance of
treasury stock are recorded as a component of retained earnings in our Consolidated Balance Sheets.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses for fiscal 2011, 2010 and 2009 were $75.1 million, $65.9
million and $67.0 million, respectively.
Foreign Currency Translation
We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange
rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We include
accumulated net translation adjustments in stockholders’ equity as a component of accumulated other comprehensive income.
Foreign Currency and Other Hedging Instruments
In countries outside the United States (“U.S.”), we transact business in U.S. dollars and in various other currencies. In
Europe and Japan, transactions that are denominated in Euro, Yen and British Pounds are subject to exposure from movements in
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 exchange rates. We use foreign exchange
option and forward contracts for Euro-,Yen- and British Pound-denominated revenue.
We account for our derivative instruments 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. Derivatives that do not qualify for hedge accounting are adjusted to fair value
through earnings. See Note 5 for information regarding our hedging activities.
Gains and losses from foreign exchange forward contracts which hedge certain balance sheet positions, primarily non-
functional currency denominated assets and liabilities (e.g., trade receivables and accounts payable) are recorded each period as
a component of interest and other income, net in our Consolidated Statements of Income. Foreign exchange forward and option
contracts hedging forecasted non-functional currency product licensing revenue, are designated as cash flow hedges under
accounting for derivative instruments and hedging activities, with gains and losses recorded net of tax, as a component of other
comprehensive income (“OCI”) in stockholders’ equity and reclassified into revenue at the time the forecasted transactions occur.
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk are short-term fixed-income investments,
structured repurchase transactions, derivatives hedging foreign currency risk, and trade receivables.
Table of Contents
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)