Apple 2006 Annual Report Download - page 96

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3—Financial Instruments (Continued)
associated with hedges of foreign currency revenue is recognized as a component of net sales in the same period as the related sales are
recognized, and other comprehensive income related to inventory purchases is recognized as a component of cost of sales in the same period as
the related costs are recognized. Typically, the Company hedges portions of its forecasted foreign currency exposure associated with revenue
and inventory purchases over a time horizon of up to 6 months.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable that the forecasted hedged
transaction will not occur in the initially identified time period or within a subsequent 2 month time period. Deferred gains and losses in other
comprehensive income associated with such derivative instruments are immediately reclassified into earnings in other income and expense.
Any subsequent changes in fair value of such derivative instruments are also reflected in current earnings unless they are re-designated as
hedges of other transactions. The Company recognized a net gain of approximately $421,000 in 2006 and net losses of $1.6 million and $2.8
million in 2005 and 2004, respectively, in other income and expense related to the loss of hedge designation on discontinued cash flow hedges
due to changes in the Company’s forecast of future net sales and cost of sales and due to prevailing market conditions. As of September 30,
2006, the Company had a net deferred gain associated with cash flow hedges of approximately $2.8 million, net of taxes, substantially all of
which is expected to be reclassified to earnings by the end of the second quarter of fiscal 2007.
The net gain or loss on the effective portion of a derivative instrument designated as a net investment hedge is included in the cumulative
translation adjustment account of accumulated other comprehensive income within shareholders’ equity. For the years ended September 30,
2006 and September 24, 2005, the Company had net gains of $7.4 million and $673,000, respectively, included in the cumulative translation
adjustment.
The Company may also enter into foreign currency forward and option contracts to offset the foreign exchange gains and losses generated by
the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of these derivatives are
recognized in current earnings in other income and expense as offsets to the changes in the fair value of the related assets or liabilities. Due to
currency market movements, changes in option time value can lead to increased volatility in other income and expense.
Note 4—Consolidated Financial Statement Details (in millions)
Other Current Assets
95
2006
2005
Vendor non-trade receivables
$
1,593
$
417
NAND flash memory prepayments
208
—
Other current assets
469
231
Total other current assets
$
2,270
$
648