VMware 2014 Annual Report Download - page 87

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assets Measured and Recorded at Fair Value on a Non
-Recurring Basis
The carrying value of VMware’s strategic investments were accounted for under the cost method. VMware evaluated the strategic
investments in its portfolio to assess whether any of its strategic investments were other-than-temporarily impaired. VMware uses Level 3 inputs
as part of its impairment analysis, including, pre- and post-money valuations of recent financing events and the impact of those on its fully
diluted ownership percentages, as well as other available information regarding the issuer’
s historical and forecasted performance. The estimated
fair value of these investments is considered in VMware’s impairment review if any events or changes in circumstances occur that might have a
significant adverse effect on their value. During the year ended December 31, 2013 , VMware recognized an other-than-temporary impairment
charge of $13 million in other income (expense), net on the consolidated statements of income for a non-recoverable strategic investment.
Strategic investments are included in other assets, net on the consolidated balance sheets. The carrying value of VMware’s strategic investments
was $110 million and $63 million as of December 31, 2014 and 2013 , respectively.
G. Derivatives and Hedging Activities
VMware conducts business on a global basis in multiple foreign currencies, subjecting the Company to foreign currency risk. To mitigate
this risk, VMware utilizes hedging contracts as described below, which potentially expose the Company to credit risk to the extent that the
counterparties may be unable to meet the terms of the agreement. VMware manages counterparty risk by seeking counterparties of high credit
quality, by monitoring credit ratings and credit spreads of, and other relevant public information about its counterparties. VMware does not, and
does not intend to, use derivative instruments for speculative purposes.
Cash Flow Hedges
To mitigate its exposure to foreign currency fluctuations resulting from operating expenses denominated in certain foreign currencies,
VMware enters into foreign currency forward contracts. The Company designates these forward contracts as cash flow hedging instruments as
the accounting criteria for such designation have been met. Therefore, the effective portion of gains or losses resulting from changes in the fair
value of these hedges is initially reported in accumulated other comprehensive income on the consolidated balance sheets and is subsequently
reclassified to the related operating expense line item in the consolidated statements of income in the same period that the underlying expenses
are incurred. During the years ended December 31, 2014 , 2013 and 2012
, the effective portion of gains or losses reclassified to the consolidated
statements of income was not material. Interest charges or “forward points” on VMware’
s forward contracts are excluded from the assessment of
hedge effectiveness and are recorded in other income (expense), net in the consolidated statements of income as incurred.
VMware enters into forward contracts annually, which have maturities of 12 months or less. As of December 31, 2014 and 2013 , VMware
had foreign currency forward contracts designated as cash flow hedges with a total notional value of $240 million and $82 million , respectively.
The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. The fair
value of these forward contracts was immaterial as of December 31, 2014 and 2013 and therefore excluded from the fair value tables above.
During the years ended December 31, 2014 and 2013 , all cash flow hedges were considered effective.
Foreign Currency Forward Contracts Not Designated as Hedges
VMware has established a program that utilizes foreign currency forward contracts to offset the foreign currency risk associated with net
outstanding monetary asset and liability positions. These forward contracts are not designated as hedging instruments under applicable
accounting guidance, and therefore all changes in the fair value of the forward contracts are reported in other income (expense), net in the
consolidated statements of income.
VMware enters into foreign currency forward contracts on a monthly basis, which have a typical contractual term of one month. As of
December 31, 2014 and 2013 , VMware had outstanding forward contracts with a total notional value of $697 million and $498 million ,
respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward
contract. The fair value of these forward contracts was immaterial as of December 31, 2014 and 2013 and therefore excluded from the fair value
tables above.
During the year ended December 31, 2014 , VMware recognized a gain of $48 million
relating to the settlement of foreign currency forward
contracts. During the years ended December 31, 2013 and 2012 , VMware recognized losses of $4 million and $10 million , respectively. Gains
and losses relating to the settlement of foreign contracts are recorded in other income (expense), net in the consolidated statements of income.
The combined gains and losses derived from the settlement of foreign forward contracts and the underlying foreign-currency denominated
assets and liabilities resulted in a net loss of $9 million , $4 million and $2 million during the years ended
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