America Online 2009 Annual Report Download - page 64

Table of Contents
From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Examples of such transactions include
business acquisitions and dispositions, including dispositions designed to be tax-free, issues related to consideration paid or received and certain financing
transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on
interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such
examinations may result in future tax and interest assessments by these taxing authorities. In determining our tax provision for financial reporting purposes,
we establish a reserve for uncertain tax positions unless such positions are determined to be "more likely than not" of being sustained upon examination, based
on their technical merits. That is, for financial reporting purposes, we only recognize tax benefits taken on the tax return that we believe are "more likely than
not" of being sustained. We record a liability for the difference between the benefit recognized and measured pursuant to the accounting guidance for income
taxes and the tax position taken on our tax return. There is considerable judgment involved in determining whether positions taken on the tax return are "more
likely than not" of being sustained. Actual results could differ from the judgments and estimates made, and we may be exposed to losses or gains that could be
material. Further, to the extent we prevail in matters for which a liability has been established, or are required to pay amounts in excess of the liability
established, our effective income tax rate in a given financial statement period could be materially affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential gain or loss arising from changes in market rates and prices, which historically, for us, is associated primarily with changes
in foreign currency exchange rates.
Prior to the spin-off, we used derivative instruments (principally foreign exchange forward contracts), which historically have been entered into by
Time Warner on our behalf, to manage the risk associated with exchange rate volatility.
We used these derivative instruments to hedge various foreign exchange exposures, including variability in foreign-currency-denominated cash flows
(such as foreign currency expenses expected to be incurred in the future) and currency risk associated with foreign-currency-denominated operating assets and
liabilities (i.e., fair value hedges).
Prior to the spin-off, all outstanding derivative instruments were settled. Subsequent to the spin-off and through December 31, 2009, we have not
entered into any derivative instruments or hedges. While we may enter into derivative instruments or hedges in the future, we do not currently believe our
exposure to foreign exchange risk is significant.
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