Citrix 2007 Annual Report Download - page 90

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CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cost of Revenues
Cost of product license revenues consists primarily of hardware, product media and duplication, manuals,
packaging materials, shipping expense, server capacity costs and royalties. In addition, the Company is a party to
licensing agreements with various entities, which give the Company the right to use certain software code in its
products or in the development of future products in exchange for the payment of fixed fees or amounts based
upon the sales of the related product. The licensing agreements generally have terms ranging from one to five
years, and generally include renewal options. However, some agreements may be perpetual unless expressly
terminated. Royalties and other costs related to these agreements are included in cost of revenues. Cost of
services revenue consists primarily of compensation and other personnel-related costs of providing technical
support and consulting, as well as the Company’s online services. Also included in cost of revenues is
amortization of product related intangible assets which includes acquired core and product technology and
associated patents.
Foreign Currency
The functional currency of each of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar.
Monetary assets and liabilities of the subsidiaries are remeasured into U.S. dollars at year-end exchange rates,
and revenues and expenses are remeasured at average rates prevailing during the year. Remeasurement and
foreign currency transaction gains (losses) of approximately $0.6 million, $(0.2) million and $(0.4) million for
the years ended December 31, 2007, 2006, and 2005, respectively, are included in other expense, net, in the
accompanying consolidated statements of income.
Derivatives and Hedging Activities
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its
related interpretations and amendments, the Company records derivatives as either assets or liabilities on the
balance sheet and measures those instruments at fair value. For derivatives that are designated as and qualify as
effective cash flow hedges, the portion of gain or loss on the derivative instrument effective at offsetting changes
in the hedged item is reported as a component of accumulated other comprehensive income (loss) and
reclassified into earnings as operating expense, net when the hedged transaction affects earnings. For derivative
instruments that are designated as and qualify as effective fair value hedges, the gain or loss on the derivative
instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in
current earnings as interest income (expense) during the period of the change in fair values. Derivatives not
designated as hedging instruments are adjusted to fair value through earnings as other expense, net, in the period
the changes in fair value occur. The application of the provisions of SFAS No. 133 could impact the volatility of
earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well
as its risk-management objective and strategy for undertaking various hedge transactions. This process includes
attributing all derivatives that are designated as cash flow hedges to floating rate assets or liabilities or forecasted
transactions and attributing all derivatives that are designated as fair value hedges to fixed rate assets or
liabilities. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis,
whether each derivative is highly effective in offsetting changes in cash flows or fair value of the hedged item.
Fluctuations in the value of the derivative instruments are generally offset by changes in the hedged item;
however, if it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a
highly effective hedge, the Company will discontinue hedge accounting prospectively for the affected derivative.
F-16