Apple 2011 Annual Report Download - page 58

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The net unrealized gains as of September 24, 2011 and September 25, 2010 related primarily to long-
term marketable securities. The Company
may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit
deterioration and duration management. The Company recognized net realized gains of $110 million during 2011 and no significant net realized
gains or losses during 2010 and 2009 related to such sales. The maturities of the Company’s long-
term marketable securities generally range
from one year to five years.
As of September 24, 2011 and September 25, 2010, gross unrealized losses related to individual securities that had been in a continuous loss
position for 12 months or longer were not significant.
The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. 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 generally be investment grade, with the primary 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 2011, 2010 and 2009, the Company did not
recognize any significant impairment charges. As of September 24, 2011, 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 on expected future cash flows on certain forecasted revenue
and cost of sales, on 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 generally up 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, 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 records all derivatives on the Consolidated Balance Sheets at fair value. The Company’
s accounting policies for these instruments
are based on whether the instruments are designated as hedge or non-
hedge instruments. The effective portions of cash flow hedges are recorded
in AOCI 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. The ineffective portions of cash flow hedges and net
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