EMC 2010 Annual Report Download - page 53

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
• Leases
Revenue from sales-type leases is recognized at the net present value of future lease payments. Revenue from operating leases is recognized over the
lease period.
• Other
We accrue for the estimated costs of systems' warranty at the time of sale. We reduce revenue for estimated sales returns at the time of sale. Systems'
warranty costs are estimated based upon our historical experience and specific identification of systems' requirements. Sales returns are estimated based upon
our historical experience and specific identification of probable returns. For our Iomega business, we defer revenue and cost of sales for inventory sold
through the channel that exceeds the channel's requirements.
Deferred Revenue
Our deferred revenue consists primarily of deferred hardware and software maintenance, recognized ratably over the contract term and deferred
professional services, including education and training, which are recognized as delivered.
Shipping and Handling Costs
Shipping and handling costs are classified in cost of product sales.
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 net losses of $4.5 million in 2010, $21.2 million
in 2009 and $28.4 million in 2008. Foreign currency translation adjustments are included in other comprehensive income (loss).
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, these
outstanding non-designated 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 consolidated income statement. These derivative contracts mature in less than one year.
We also 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 and we did not have any derivatives designated as fair value hedges as of December 31, 2010. 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, certain criteria must be met, which includes (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 consolidated 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 consolidated 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
consolidated income statement in the then-current period. Any ineffective portion of the derivatives
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