Amazon.com 2001 Annual Report Download - page 62

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
France and Japan, respectively. Assets and liabilities of these subsidiaries are translated into U.S. dollars at year-
end exchange rates, and revenues and expenses are translated at average rates prevailing during the year.
Translation adjustments are included in “Accumulated other comprehensive loss,” a separate component of
stockholders’ deficit. Transaction gains and losses arising from transactions denominated in a currency other than
the functional currency of the entity involved, which have been insignificant, are included in “Other income
(expense), net” on the consolidated statements of operations.
Derivative Financial Instruments
Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) “Accounting for Derivative Instruments and Hedging
Activities,” (SFAS No. 133), which requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded each period in current results of operations or
other comprehensive income (loss) depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For a derivative designated as a fair value hedge, the gain or loss of the
derivative in the period of change and the offsetting loss or gain of the hedged item attributed to the hedged risk
are recognized in results of operations. For a derivative designated as a cash flow hedge, the effective portion of
the derivative’s gain or loss is initially reported as a component of other comprehensive income (loss) and
subsequently reclassified into results of operations when the hedged exposure affects results of operations. The
ineffective portion of the gain or loss of a cash flow hedge is recognized currently in results of operations. For a
derivative not designated as a hedging instrument, the gain or loss is recognized currently in results of operations.
The Company is exposed to the risk of fluctuations in foreign exchange rates between the U.S. dollar and
the Euro associated with its 6.875% PEACS (Note 7). To minimize a portion of the risk from this exposure the
Company has designated swap and forward agreements as cash flow hedges of a portion of the 6.875% PEACS
principal and interest based upon the criteria established by SFAS No. 133. The terms of the hedge instruments
have been structured to match the related terms of the hedged portion of the 6.875% PEACS. No net gains or
losses, resulting from hedge ineffectiveness, were recognized in results of operations during the year ended
December 31, 2001.
The Company holds strategic investments in warrants to purchase equity securities of other companies.
Warrants that can be exercised and settled by delivery of net shares such that the Company pays no cash upon
exercise (“net share warrants”) are deemed derivative financial instruments. Net share warrants are not
designated as hedging instruments; accordingly, gains or losses resulting from changes in fair value are
recognized on the consolidated statements of operations, “Other gains (losses), net,” in the period of change. The
Company determines the fair value of its warrants through option-pricing models using current market price and
volatility assumptions, including public-company market comparables for its private-company warrants.
The adoption of SFAS No. 133 on January 1, 2001 resulted in cumulative transition losses of $11 million
included in the results of operations and a stockholders’ deficit adjustment of $12 million. Transition losses
included in “Cumulative effect of change in accounting principle” are attributable to approximately $3 million in
losses reclassified from “Accumulated other comprehensive loss” on warrants previously reported at fair value
and classified as available-for-sale, and approximately $8 million in losses on warrants previously reported at
cost. No warrant investments are designated as hedging instruments. Transition losses in “Accumulated other
comprehensive loss” are attributable to approximately $15 million in losses on the swap agreement designated as
a cash flow hedge of a portion of the 6.875% PEACS offset by the approximately $3 million in losses reclassified
to results of operations on derivative instruments not designated as hedging instruments.
Effective January 1, 2001, currency gains and losses arising from the remeasurement of the 6.875%
PEACS’ principal from Euros to U.S. dollars each period are recorded to “Other gains (losses), net.” Prior to
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