Apple 1998 Annual Report Download - page 41

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
exposures that are immaterial either in terms of their minimal U.S. dollar value or in terms of the related currency's historically high correlation
with the U.S. dollar. Foreign exchange forward contracts are carried at fair value in other current liabilities. The premium costs of purchased
foreign exchange option contracts are recorded in other current assets and amortized over the life of the option.
Probable but not firmly committed transactions comprise sales of the Company's products and purchases of raw material in currencies other
than the functional currency. A majority of these transactions are made through the Company's subsidiaries in Europe, Asia (particularly
Japan), Canada, and Australia. The Company purchases foreign exchange option contracts to hedge the currency exchange risks associated
with these probable but not firmly committed transactions. The Company also sells foreign exchange option contracts, in order to partially
finance the purchase of these foreign exchange option contracts. Although the Company entered into no such transactions in fiscal 1998, the
Company occasionally enters into other foreign exchange transactions, which are intended to reduce the costs associated with its foreign
exchange risk management programs. The duration of the Company's foreign exchange hedging instruments, whether for firmly committed
transactions or for probable but not firmly committed transactions, normally do not extend beyond six months.
In addition, the Company has entered into foreign exchange forward contracts to hedge certain intercompany loan transactions. These forward
contracts effectively change certain foreign currency denominated debt into U.S. dollar denominated debt, which better matches against the
Company's U.S. dollar denominated cash equivalents and short-term investments. No such contracts existed as of September 25, 1998.
Interest rate and foreign exchange instruments generally qualify as accounting hedges if their maturity dates are the same as the hedged
transactions and if the hedged transactions meet certain requirements. The Company monitors its interest rate and foreign exchange positions
on a regular basis based on applicable and commonly used pricing models. The correlation between the changes in the fair value of hedging
instruments and the changes in the underlying hedged items is assessed periodically over the life of the hedged instrument. In the event that it is
determined that a hedge is ineffective, including if and when the hedged transactions no longer exists, the Company recognizes in income the
change in market value of the instrument beginning on the date it was no longer an effective hedge.
Gains and losses on accounting hedges of existing assets or liabilities are generally recorded currently in income or shareholders' equity against
the losses and gains on the hedged transactions. Gains and losses related to qualifying accounting hedges of firmly committed or probable but
not firmly committed transactions are deferred and recognized in income in the same period as the hedged transactions. Gains and losses on
accounting hedges realized before the settlement date of the related hedged transaction are also generally deferred and recognized in income in
the same period as the hedged transactions.
Gains and losses on interest rate and foreign exchange instruments not accounted for as hedges are recorded currently in income as a
component of interest and other income (expense), net. Sold interest rate and foreign exchange instruments do not qualify as accounting
hedges. Premiums associated with sold foreign exchange option contracts are recorded in other current assets and amortized over the life of the
option.
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