Apple 2005 Annual Report Download - page 67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—Summary of Significant Accounting Policies (Continued)
hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the net
gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income in shareholders’ equity and
reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting
treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For derivative
instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges, the net
gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized
in earnings in the current period. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge
of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency
translation adjustment. For forward contracts designated as net investment hedges, the Company excludes changes in fair value relating to
changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this component are
recognized in current earnings.
The Company may enter into foreign currency forward contracts to hedge the translation and economic exposure of a net investment position in
a foreign subsidiary. For such contracts, hedge effectiveness is measured based on changes in the fair value of the contract attributable to
changes in the spot exchange rate. The effective portion of the net gain or loss on a derivative instrument designated as a hedge of the net
investment position in a foreign subsidiary is reported in the same manner as a foreign currency translation adjustment. Any residual changes in
fair value of the forward contract, including changes in fair value based on the differential between the spot and forward exchange rates, are
recognized in current earnings in other income and expense.
Inventories
Inventories are stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of the inventories exceeds their
market value, provisions are made currently for the difference between the cost and the market value. The Company’s inventories consist
primarily of finished goods for all periods presented.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is computed by use of the straight-line method over the estimated useful lives of
the assets, which are 30 years for buildings, up to 5 years for equipment, and the shorter of lease terms or 10 years for leasehold improvements.
The Company capitalizes eligible costs to acquire or develop internal-
use software that are incurred subsequent to the preliminary project stage.
Capitalized costs related to internal-use software are amortized using the straight-line method over the estimated useful lives of the assets,
which range from 3 to 5 years. Depreciation and amortization expense on property and equipment was $141 million, $126 million, and $108
million during 2005, 2004, and 2003, respectively.
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