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Table of Contents
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
77
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 2015 and 2014, we determined there were no other-than-temporary
impairments on our cost method investments.
As of November 27, 2015, the carrying value of our lease receivables approximated fair value, based on Level 2 valuation
inputs which include Treasury rates, London Interbank Offered Rate (“LIBOR”) interest rates and applicable credit spreads. See
Note 15 for further details regarding our investment in lease receivables.
The fair value of our senior notes was $1.97 billion as of November 27, 2015, 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 and Hedging Programs
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.
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 (expense), net for cash flow hedges due to hedge ineffectiveness was
insignificant for all fiscal years presented. The time value of purchased contracts is recorded in interest and other income (expense),
net in our Consolidated Statements of Income.
The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance which are
largely mitigated with collateral security agreements that provide for collateral to be received or posted when the net fair value of
certain financial instruments fluctuates from contractually established thresholds. In addition, we enter into master netting
arrangements which have the ability to further limit credit-related losses with the same counterparty by permitting net settlement
of transactions. Our hedging policy also establishes maximum limits for each counterparty to mitigate any concentration of risk.
Fair Value Hedging—Hedges of Interest Rate Risks
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.
Cash Flow Hedging—Hedges of Forecasted Foreign Currency Revenue and Interest Rate Risks
In countries outside the United States, 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.
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