Apple 2009 Annual Report Download - page 71

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Table of Contents
The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. The unrealized
losses on the Company’
s marketable securities were caused primarily by changes in market interest rates, specifically, widening credit spreads.
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 investment grade, primarily rated single-
A or better, with the objective of minimizing
the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating the
investments for other-than-
temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has
been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’
s intent to sell, or whether it is more likely
than not it will be required to sell, the investment before recovery of the investment’
s amortized cost basis. During the years ended
September 26, 2009 and September 27, 2008, the Company did not recognize any material impairment charges. As of September 26, 2009, the
Company does not consider any of its investments to be other-than-temporarily impaired.
Derivative Financial Instruments
The Company uses derivatives to partially offset its business exposure to foreign currency exchange risk. The Company may enter into foreign
currency forward and option contracts to offset some of the foreign exchange risk of expected future cash flows on certain forecasted revenue
and cost of sales, of net investments in certain foreign subsidiaries, and on certain existing assets and liabilities. To help protect gross margins
from fluctuations in foreign currency exchange rates, certain of the Company’
s subsidiaries whose functional currency is the U.S. dollar, hedge a
portion of forecasted foreign currency revenue. The Company’
s subsidiaries whose functional currency is not the U.S. dollar and who sell in
local currencies, may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’
functional currencies. The
Company typically hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases for three to six
months. To help protect the net investment in a foreign operation from adverse changes in foreign currency exchange rates, the Company may
enter into foreign currency forward and option contracts to offset the changes in the carrying amounts of these investments due to fluctuations in
foreign currency exchange rates. The Company may also enter into foreign currency forward and option contracts to partially offset the foreign
currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-
functional currencies.
However, the Company may choose not to hedge certain foreign currency exchange exposures for a variety of reasons, including but not limited
to immateriality, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the
hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.
The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-
hedge
instruments. The Company records all derivatives on the Consolidated Balance Sheets at fair value. The effective portions of cash flow hedges
are recorded in other comprehensive income until the hedged item is recognized in earnings. The effective portions of net investment hedges are
recorded in other comprehensive income as a part of the cumulative translation adjustment. Derivatives that are not designated as hedging
instruments and the ineffective portions of cash flow hedges and net investment hedges are adjusted to fair value through earnings in other
income and expense.
The Company had a net deferred gain associated with cash flow hedges of approximately $31 million and $19 million, net of taxes, recorded in
other comprehensive income as of September 26, 2009 and September 27, 2008, respectively. Other comprehensive income associated with cash
flow hedges of foreign currency revenue is recognized as a component of net sales in the same period as the related revenue is recognized, and
other comprehensive income related to cash flow hedges of inventory purchases is recognized as a component of cost of sales in the same period
as the related costs are recognized. The portion of the Company’
s net deferred gain related to products under subscription accounting is expected
to be recorded in earnings ratably over the related products’
estimated economic lives beginning when the hedged transactions occur, while the
portion of the net deferred gain related to other products is expected to be recorded in earnings at the time the hedged transactions occur. As of
September 26, 2009, the hedged transactions are expected to occur within six months.
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