Apple 2008 Annual Report Download - page 54

Table of Contents
Other Obligations
Other outstanding obligations were $471 million as of September 27, 2008, which related to advertising, research and development, Internet and
telecommunications services, and other obligations.
During the first quarter of 2008, the Company adopted the provisions of FIN 48. The Company had historically classified interest and penalties
and unrecognized tax benefits as current liabilities, but beginning with the adoption of FIN 48 the Company has reclassified gross interest and
penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities
within the Consolidated Balance Sheet. As of September 27, 2008, the Company recorded gross unrecognized tax benefits of $506 million and
gross interest and penalties of $219 million, both of which are classified as non-current liabilities in the Consolidated Balance Sheet. At this
time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the
timing of tax audit outcomes; therefore, such amounts are not included in the above contractual obligation table.
Indemnifications
The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software
infringes third-party intellectual property rights. Other agreements entered into by the Company sometimes include indemnification provisions
under which the Company could be subject to costs and/or damages in the event of an infringement claim against the Company or an
indemnified third-party. However, the Company has not been required to make any significant payments resulting from such an infringement
claim asserted against it or an indemnified third-party and, in the opinion of management, does not have a liability related to unresolved
infringement claims subject to indemnification that would have a material adverse effect on its financial condition or operating results.
Therefore, the Company did not record a liability for infringement costs as of either September 27, 2008 or September 29, 2007.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Foreign Currency Risk Management
The Company regularly reviews its foreign exchange forward and option positions, both on a stand-alone basis and in conjunction with its
underlying foreign currency and interest rate related exposures. However, given the effective horizons of the Company’s risk management
activities and the anticipatory nature of the exposures, there can be no assurance the hedges will offset more than a portion of the financial
impact resulting from movements in either foreign exchange or interest rates. In addition, the timing of the accounting for recognition of gains
and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the
underlying economic exposures and, therefore, may adversely affect the Company’s financial condition and operating results.
Interest Rate Risk
While the Company is exposed to interest rate fluctuations in many of the world’s leading industrialized countries, the Company’s interest
income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. As such, changes in U.S. interest rates affect the
interest earned on the Company’s cash, cash equivalents, and short-term investments, the value of those investments, as well as costs associated
with foreign currency hedges.
The Company’s short-term investment policy and strategy attempts primarily to preserve capital and meet liquidity requirements. A portion of
the Company’s cash is managed by external managers within the guidelines of the Company’s investment policy and to an objective market
benchmark. The Company’
s internal portfolio is benchmarked against external manager performance, allowing for differences in liquidity needs.
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio. The Company
typically invests in highly rated securities and its policy generally limits the amount of credit exposure to any one issuer. The Company’s
investment policy requires investments to be rated single-A or better with the objective of minimizing the potential risk of principal loss. All
highly liquid investments with initial maturities of three months or less at the date of purchase are classified as cash
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