Apple 2013 Annual Report Download - page 60

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As of September 28, 2013 and September 29, 2012, 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 28, 2013, the Company considered the declines in market value of its marketable securities
investment portfolio to be temporary in nature and did 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, changes in market interest
rates, 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 2013, 2012 and 2011 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 and interest rate risk.
The Company may enter into forward contracts, option contracts, swaps, or other derivative instruments to offset
some of the risk on expected future cash flows, 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 hedges a portion of its forecasted foreign currency exposure associated with revenue
and inventory purchases, typically for up to 12 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.
To help protect against adverse fluctuations in interest rates, the Company may enter into interest rate swaps,
options, or other instruments to offset a portion of the changes in income or expense due to fluctuations in
interest 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 OCI as a part of the
cumulative translation adjustment. The ineffective portions of cash flow hedges and net investment hedges are
recorded in other income and expense. Derivatives that are not designated as hedging instruments are adjusted to
fair value through earnings in the financial statement line item to which the derivative relates.
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