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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
79
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 2014, we determined there were no other-than-temporary impairments
on our cost method investments. During fiscal 2013, we determined there were other-than-temporary impairments of $7.0 million
on certain of our cost method investments which were written down to fair value.
As of November 28, 2014, the carrying value of our lease receivables approximated fair value, based on Level 2 valuation
inputs which include Treasury rates, London Interbank Offered Rates (“LIBOR”) and applicable credit spreads. See Note 15 for
further details regarding our investment in lease receivables.
The fair value of our senior notes was $1.6 billion as of November 28, 2014, based on observable market prices in less
active market and categorized as Level 2. See Note 16 for further details regarding our debt.
NOTE 5. DERIVATIVES 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.
Fair Value Hedging—Interest Rate Swap
During the third quarter of fiscal 2014, we entered into interest rate swaps designated as a fair value hedge related to our
$900 million of 4.75% fixed interest rate senior notes due February 1, 2020 (the “2020 Notes”). In effect, the interest rate swaps
convert the fixed interest rate on our 2020 Notes to a floating interest rate based on the LIBOR. Under the terms of the swaps, we
will pay monthly interest at the one-month LIBOR rate plus a fixed number of basis points on the $900 million notional amount
through February 1, 2020. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. See Note 16 for
further details regarding our debt.
The interest rate swaps are accounted for as fair value hedges and substantially offset the changes in fair value of the hedged
portion of the underlying debt that are attributable to the changes in market risk. Therefore, the gains and losses related to changes
in the fair value of the interest rate swaps are included in interest and other income (expense), net in our Consolidated Statements
of Income. The fair value of the interest rate swaps is reflected in other assets in our Consolidated Balance Sheets.
Economic Hedging—Hedges of Forecasted Transactions
In countries outside the U.S., we transact business in U.S. Dollars and in various other currencies. We may use foreign
exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign
currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to 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 these contracts as derivative instruments and they are classified as either assets or liabilities on the balance
sheet and measured on a recurring basis at fair value. Gains and losses resulting from changes in fair value are accounted for
depending on the use of the contract 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 (expense), net in our
Consolidated Statements of Income at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge
accounting treatment, the changes in fair market value from period to period are recorded in interest and other income (expense),
net in our Consolidated Statements of Income. For fiscal 2014 and 2013, net gains or losses recognized in other income relating