Apple 2012 Annual Report Download - page 56

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The net unrealized gains as of September 29, 2012 and September 24, 2011 are 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 net realized gains or losses recognized during 2012 and 2011 were $183 million and $110 million,
respectively, and no significant net realized gains or losses during 2010 related to such sales. The maturities of
the Company’s long-term marketable securities generally range from one to five years.
As of September 29, 2012 and September 24, 2011, gross unrealized losses related to individual securities that
had been in a continuous loss position for 12 months or longer were not significant.
As of September 29, 2012, the Company considers the declines in market value of its marketable securities
investment portfolio to be temporary in nature and does not consider any of its investments other-than-
temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy
generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to 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 an investment for other-
than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair
value has been below its 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 cost basis. During 2012, 2011 and 2010, the Company did not recognize any
significant impairment charges.
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 in the Consolidated Balance Sheets at fair value. The Company’s
accounting treatment of these instruments is 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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