Dell 2006 Annual Report Download - page 69

Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Inventories — Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out basis.
Property, Plant, and Equipment — Property, plant, and equipment are carried at depreciated cost. Depreciation is provided
using the straight-line method over the estimated economic lives of the assets, which range from ten to thirty years for
buildings and two to five years for all other assets. Leasehold improvements are amortized over the shorter of five years or
the lease term. Gains or losses related to retirements or disposition of fixed assets are recognized in the period incurred. Dell
performs reviews for the impairment of fixed assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Dell capitalizes eligible internal-use software development costs incurred
subsequent to the completion of the preliminary project stage. Development costs are amortized over the shorter of the
expected useful life of the software or five years.
Foreign Currency Translation — The majority of Dell's international sales are made by international subsidiaries, most of
which have the U.S. dollar as their functional currency. Dell's subsidiaries that do not have the U.S. dollar as their functional
currency translate assets and liabilities at current rates of exchange in effect at the balance sheet date. Revenue and
expenses from these international subsidiaries are translated using the monthly average exchange rates in effect for the
period in which the items occur. The resulting gains and losses from these foreign currency translation adjustments totaled a
$33 million loss, $22 million loss, and $14 million loss at February 2, 2007, February 3, 2006 and January 28, 2005,
respectively, and are included as a component of accumulated other comprehensive income (loss) in stockholders' equity.
Local currency transactions of international subsidiaries that have the U.S. dollar as the functional currency are remeasured
into U.S. dollars using current rates of exchange for monetary assets and liabilities and historical rates of exchange for
nonmonetary assets and liabilities. Gains and losses from remeasurement of monetary assets and liabilities are included in
investment and other income, net.
Hedging Instruments — Dell applies Statement of Financial Accounting Standards ("SFAS") No. 133 ("SFAS 133"),
Accounting for Derivative Instruments and Hedging Activities, as amended, which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires Dell to recognize all derivatives as either
assets or liabilities in its Consolidated Statements of Financial Position and measure those instruments at fair value. Dell
uses derivative instruments to hedge foreign exchange risk and interest rate risk.
Dell uses purchased option and forward contracts designated as cash flow hedges to protect against the foreign currency
exchange risk inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. According to
SFAS 133, designated hedging instruments qualify for cash flow hedge accounting if all of the following criteria are met: at
inception of the hedge, there is formal documentation of the hedging relationship and the entity's risk management objective
for undertaking the hedge; both at hedge inception and on an ongoing basis, the hedging relationship is expected to be
highly effective; the forecasted transaction is specifically identified; the occurrence of the forecasted transaction is probable;
and the forecasted transaction is a transaction with a party external to the reporting entity. If the derivative qualifies for cash
flow hedge accounting, the effective portion of the change in the fair value of the derivative is initially deferred in
comprehensive income (loss), net of tax. The ineffective portion of the change in the fair value of a cash flow hedge is
recognized currently in earnings and is reported as a component of investment and other income, net. Dell also uses forward
contracts to hedge monetary assets and liabilities, primarily receivables and payables, denominated in a foreign currency.
These contracts are not designated as hedging instruments under SFAS 133, and therefore, the change in the instrument's
fair value is recognized currently in earnings and is reported as a component of investment and other income, net.
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