Apple 2014 Annual Report Download - page 44

Download and view the complete annual report

Please find page 44 of the 2014 Apple annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 117

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117

Legal and Other Contingencies
As discussed in Part I, Item 3 of this Form 10-K under the heading “Legal Proceedings” and in Part II, Item 8 of this Form 10-K
in the Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies,” the Company is subject to
various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it is
probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both
the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there
was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a
recorded accrual, with respect to loss contingencies for legal and other contingencies. However, the outcome of legal
proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management
considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the
Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial
statements for that reporting period could be materially adversely affected.
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 and interest rate swaps, both on a
stand-alone basis and in conjunction with its underlying foreign currency and interest rate related exposures. Given the effective
horizons of the Company’s risk management activities and the anticipatory nature of the exposures, there can be no assurance
these positions will offset more than a portion of the financial impact resulting from movements in either foreign exchange or
interest rates. Further, the recognition of the gains and losses related to these instruments 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 are most sensitive to fluctuations in U.S. interest rates. Changes in U.S. interest rates
affect the interest earned on the Company’s cash, cash equivalents and marketable securities and the fair value of those
securities, as well as costs associated with hedging and interest paid on the Company’s debt.
Investments
The Company’s investment policy and strategy are focused on preservation of capital and supporting the Company’s liquidity
requirements. The Company uses a combination of internal and external management to execute its investment strategy and
achieve its investment objectives.
The Company’s exposure to changes in interest rates relates primarily to the Company’s investment portfolio. 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.
To provide a meaningful assessment of the interest rate risk associated with the Company’s investment portfolio, the Company
performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment
portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 27, 2014,
a hypothetical 100 basis point increase in interest rates across all maturities would result in a $3.4 billion incremental decline in
the fair market value of the portfolio. As of September 28, 2013, a similar 100 basis point increase in the yield curve would have
resulted in a $2.7 billion incremental decline in the fair market value of the portfolio. Such losses would only be realized if the
Company sold the investments prior to maturity.
Apple Inc. | 2014 Form 10-K | 42