THQ 2006 Annual Report Download - page 63

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foreign currency transaction losses were $0.3 million, and for the fiscal years ended March 31, 2005 and
2004, foreign currency transaction gains were $2.3 million and $1.4million, respectively, and are included
in general and administrative expenses in our consolidated statements of operations.
Cash, Cash Equivalents, Short-Term Investments and Financial Instruments. We consider all highly liquid
investments with maturities less than three months when purchased to be cash equivalents. Investments
with maturities greater than three months, but less than one year, when purchased are considered short-
term investments. Our short-term investments are primarily auction rate securities. These auction rate
securities are variable rate bonds tied to short-term interest rates with maturities on the face of the
underlying security in excess of 90 days. Auction rate securities have interest rate resets through a modified
Dutch auction at predetermined short-term intervals, typically every 7, 28, or 35 days. Interest paid during
a given period is based upon the interest rate determined during the prior auction. Although thesecurities
are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of
the liquidity provided through the interest rate reset.We had $280.1 million and $209.4 million of
investments in auction rate securities as of March 31, 2006 and March 31, 2005, respectively. These short-
term investments are classified as available-for-sale and changes in the fair value are included in
accumulated other comprehensive income (loss), net of applicable income taxes, in the consolidated
financial statements. At March 31, 2006, we did not have any short-term investments classifiedas held to
maturity, andat March 31, 2005, our short-term investments classified as held to maturity were municipal
bonds with maturity dates of less than one year.
Financial Instruments. The carrying value of certain financial instruments, including cash and cash
equivalents, short-term investments held to maturity, accounts receivable, accounts payable, accrued
expenses and accrued royalties, approximate fair value based on their short-term nature. Short-term
investments classified as available for sale are stated at fair value.
We account for our derivative and hedging activities under Statements of Financial Accounting Standards
(“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The
assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair
value in other current assets or liabilities, respectively, on our consolidated balance sheets. As discussed
below, gains and losses resulting from changes in fair value are accounted for depending on the use of the
derivative and whether it is designated and qualifies for hedge accounting.
We utilize forward contracts in order to reduce financial market risks. These instruments are used to hedge
foreign currency exposures of underlying assets, liabilities, or certain forecasted foreign currency
denominated transactions. Our accounting policies for these instruments are based on whether they meet
the criteria for designation as hedging transactions. Changes in fair value of derivatives that are designated
as cash flow hedges, are highly effective, and qualify as hedging instruments, are recorded in other
comprehensive income until the underlying hedged item is recognized in earnings within the financial
statement line item consistent with the hedged item. Any ineffective portion of a derivative change in fair
value is immediately recognized in earnings. Duringeach of the periods presented we did not have any
derivatives that qualify for hedge accounting. Changes in the fair value of derivatives that do not qualify for
hedge accounting treatment are recorded in earnings. The fair value of foreign currency contracts is
estimated based on the forward rate of the various hedged currencies as of the end of the period. As of
March 31, 2006 and 2005, we had foreign exchange forward contracts in the notional amount of $60.3
million and $35.1 million, respectively. The net gains recognized from foreign currency contracts in fiscal
2006 and fiscal 2005were $493,000 and $682,000, respectively, and are included in general and
administrative expense in our consolidated statements of operations. We did not have any gains or losses
from foreign currency contracts in fiscal years prior to 2005.
Allowance for Price Protection, Returns and Doubtful Accounts. We derive revenues from sales of
packaged software for video game systems and personal computers and sales of content and services for