THQ 2006 Annual Report Download - page 56

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48
subject to risks typical of an international business, including, but not limited to, foreign currency exchange
rate volatility. Accordingly, our future results could be materially and adversely affected by changes in
foreign currency exchange rates.
Throughout the year, we frequently monitor the volatility of the GBP and the Euro (and all other
applicable currencies). We utilize foreign exchange forward contracts to mitigate foreign currency risk
associated with foreign currency denominated assets and liabilities, primarily certain inter-company
receivables and payables. Our foreign exchange forward contracts are accounted for as derivatives whereby
the fair value of the contracts are reflected as other current assets or other current liabilities and the
associated gains and losses are reflected in general and administrative expense in the consolidated
statements of operations. The forward contracts generally have a contractual term of less than one month
and are transacted near month-end. Therefore, the fair value of the forward contracts generally is not
significant at each month-end.
Foreign exchange forward contracts are designed to offset gains and losses on the underlying foreign-
currency-denominated assets and liabilities. Any movement in foreign currency exchange rates resulting in
a gain or loss on our foreign exchange forward contracts would be offset by an opposing gain or loss in the
underlying foreign-currency-denominated assets and liabilities that were hedged and would not have a
material impact on our financial position.
As of March 31, 2006, we had foreign exchange forward contracts in the notional amount of $60.3 million,
all with maturities of less than one month, consisting primarily of Euros, Great British Pounds, and
Canadian Dollars. The counterparties to these forward contracts are creditworthy multinational
commercial and investment banks. The risks of counterparty nonperformance associated with these
contracts are not considered to be material. Notwithstanding our efforts to manage foreign exchange risks,
there can be no assurances that our mitigating or hedging activities will adequately protect us against the
risks associated with foreign currency fluctuations.
We do not hedge foreign currency translation risk. Ahypothetical 10% adverse change in exchange rates
wouldresult in a reduction of reported net sales of approximately $31.9 million and a reduction of
reported income before taxes of approximately $1.0 million. This estimate assumes an adverse shift in all
foreign currency exchange rates, which do not always move in the same direction; actual results may differ
materially.
Item8. Consolidated Financial Statementsand Supplementary Data
The report of Independent RegisteredPublic Accounting Firm, consolidated financial statements and
notes to consolidated financial statements follow below.