EMC 2007 Annual Report Download - page 58

EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Shipping and Handling Costs
Shipping and handling costs are classified in cost of product sales.
Sale of Stock by a Subsidiary
EMC accounts for the sale of stock by a subsidiary in accordance with the Securities and Exchange Commissions' Staff Accounting Bulletin No. 51
"Accounting for Sales of Stock by a Subsidiary" ("SAB 51"). SAB 51 requires that the difference between the carrying amount of the parent's investment in a
subsidiary and the underlying net book value of the subsidiary after the issuance of stock by the subsidiary be reflected as either a gain or loss in the income
statement or as an equity transaction increasing or decreasing additional paid-in capital. EMC has elected to record gains or losses resulting from the sale of
stock by a subsidiary as an equity transaction.
Foreign Currency Translation
The local currency is the functional currency of the majority of our subsidiaries. Assets and liabilities are translated into U.S. dollars at exchange rates in
effect at the balance sheet date. Income and expense items are translated at average rates for the period.
Gains and losses from foreign currency transactions are included in other expense, net, and consist of losses of $3.2 million in 2007, $5.7 million in 2006
and $17.9 million in 2005.
Derivatives
We use derivatives to hedge foreign currency exposures related to foreign currency denominated assets and liabilities and forecasted revenue and
expense transactions.
We hedge our exposure in foreign currency denominated monetary 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. Accordingly, all
outstanding derivatives are recognized on the balance sheet at fair value and the changes in fair value from these contracts are recorded in other expense, net,
in the income statement. These derivative contracts mature in less than one year.
We use foreign currency forward and option contracts to hedge our exposure on a portion of our 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 loss until the underlying forecasted transactions occur. To achieve hedge accounting, the criteria specified in
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instrument and Hedging Activities" ("FAS No. 133") 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 at a minimum on a quarterly basis. Absent meeting these criteria, changes in fair value are recognized currently in
other expense, net, in the income statement. 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 loss to the income statement, 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 loss will be
reclassified to other expense, net, in the income statement in the then-current period. Any ineffective portion of the derivatives designated as cash flow hedges
is recognized in current earnings, which did not represent a material amount for the fiscal years presented. The ineffective portion of the derivatives consists
of gains or losses associated with differences between actual and forecasted amounts. Our cash flow hedges generally mature within six months or less. Total
cash flow hedges outstanding as of December 31, 2007, 2006 and 2005 were $86 million, $93 million and $107 million, respectively.
We do not engage in currency speculation. For purposes of presentation within the statement of cash flows, derivative gains and losses are presented
within net cash provided by operating activities.
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