EMC 2002 Annual Report Download - page 50

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Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivatives
EMC uses derivatives to hedge foreign currency exposures related to its foreign currency denominated assets and liabilities and forecasted revenue and
expense transactions.
EMC hedges its exposure in foreign currency denominated assets and liabilities with foreign currency forward and option contracts. Since these
derivatives hedge existing exposures that are denominated in foreign currencies, the contracts do not qualify for hedge accounting. All outstanding derivatives
are recognized on the balance sheet at fair value and the changes in fair value from these contracts as well as the underlying exposures are generally offsetting,
and are recorded in other expense, net in the statement of operations. These derivative contracts mature within one year or less.
EMC uses foreign currency forward and option contracts to hedge its exposure on a portion of its forecasted revenue and expense transactions. These
derivatives are designated as cash flow hedges. All outstanding derivatives are recognized on the balance sheet at fair value and changes in their fair value are
recorded in accumulated other comprehensive income (loss) until the underlying forecasted transaction occurs. To achieve hedge accounting, the criteria
specified in Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instrument and Hedging Activities" must be met.
These criteria include (i) ensuring at the inception of the hedge that formal documentation exists for both the hedging relationship and the entity's risk
management objective and strategy for undertaking the hedge, and (ii) at the inception of the hedge and on an ongoing basis, the hedging relationship is
expected to be highly effective in achieving offsetting changes in fair value attributed to the hedged risk during the period that the hedge is designated.
Further, an assessment of effectiveness is required whenever financial statements or earnings are reported. Absent meeting these criteria, changes in fair value
are recognized currently in other expense, net in the statement of operations. Once the underlying forecasted transaction is realized, the gain or loss from the
derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the statement of operations, in the
related revenue or expense caption, as appropriate. In the event the underlying forecasted transaction does not occur, the amount recorded in accumulated
other comprehensive income (loss) will be reclassified to the other expense, net, in the statement of operations in the then-current period. Amounts
reclassified due to transactions that did not occur were immaterial for 2002, 2001 and 2000, respectively. EMC's cash flow hedges generally mature within six
months or less.
Since EMC is using foreign exchange derivative contracts to hedge foreign exchange exposures, the changes in the value of the derivatives are highly
effective in offsetting changes in the fair value or cash flows of the hedged item. Any ineffective portion of the derivatives designated as cash flow hedges is
recognized in current earnings, which represented an immaterial amount for the fiscal years presented. The ineffective portion of the derivatives consists of
option premiums, discounts or premiums on forward contracts and gains or losses associated with differences between actual and forecasted amounts.
EMC does not engage in currency speculation. For purposes of presentation within the statement of cash flows, derivative gains and losses are
presented within cash provided by operating activities.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with a maturity of ninety days or less at the time of purchase. Cash equivalents consist
primarily of money market securities. Cash equivalents are stated at amortized cost plus accrued interest, which approximates market. Total cash equivalents
were $1,223.6 million and $1,403.0 million at December 31, 2002 and 2001, respectively.
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