Dell 2006 Annual Report Download - page 84

Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Foreign Currency Instruments
Dell uses purchased option contracts and forward contracts designated as cash flow hedges to protect against the foreign
currency exchange risk inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. Hedged
transactions include international sales by U.S. dollar functional currency entities, foreign currency denominated purchases
of certain components, and intercompany shipments to some international subsidiaries. The risk of loss associated with
purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward
contracts is equal to the exchange rate differential from the time the contract is entered into until the time it is settled. These
contracts typically expire in 12 months or less.
If the derivative is designated as a cash flow hedge and qualifies for hedge accounting, the effective portion of the change in
the fair value of the derivative is initially deferred in comprehensive income (loss) net of tax. These amounts are
subsequently recognized in income as a component of net revenue or cost of revenue in the same period the hedged
transaction affects earnings. The ineffective portion of the change in fair value of a cash flow hedge is recognized currently in
earnings and is reported as a component of investment and other income, net. Dell assesses hedge effectiveness both at the
onset of the hedge as well as at the end of each fiscal quarter throughout the life of the derivative. Hedge ineffectiveness is
measured by comparing the hedging instrument's cumulative change in fair value from inception to maturity relative to the
cumulative change in fair value of the forecasted transaction. Dell recorded hedge ineffectiveness income of $2 million,
$3 million, and $5 million during Fiscal 2007, Fiscal 2006, and Fiscal 2005, respectively. During Fiscal 2007, 2006, and 2005,
Dell did not discontinue any cash flow hedges that had a material impact on Dell's results of operations as substantially all
forecasted foreign currency transactions were realized in Dell's actual results.
At February 2, 2007, Dell held purchased foreign currency option contracts with a notional amount of approximately
$3.4 billion, a net asset value of $90 million, and a net unrealized loss of $14 million, net of taxes. At February 2, 2007, Dell
held foreign currency forward contracts with a notional amount of approximately $3.0 billion, a net liability value of $15 million
and a net unrealized gain of $27 million, net of taxes.
At February 3, 2006, Dell held purchased foreign currency option contracts with a notional amount of approximately
$3.3 billion, a net asset value of $145 million and a net unrealized gain of $1 million, net of taxes. At February 3, 2006, Dell
held foreign currency forward contracts with a notional amount of approximately $3.3 billion, a net asset value of $1 million
and a net unrealized loss of $18 million, net of taxes. Changes in the aggregate unrealized net gain (loss) of Dell's cash flow
hedges that are recorded as a component of comprehensive income (loss), net of tax are presented in the table below. Dell
expects to reclassify substantially all of the amount recorded in comprehensive income (loss) at February 2, 2007 into
earnings during the next fiscal year providing an offsetting economic impact against the underlying transactions.
Fiscal Year Ended
February 2, February 3, January 28,
2007 2006 2005
As As
Restated Restated
(in millions)
Aggregate unrealized net loss at beginning of year $ (17) $ (26) $ (72)
Net (losses) gains reclassified to earnings (260) 225 (356)
Change in fair value of cash flow hedges 290 (216) 402
Aggregate unrealized net gain (loss) at end of year $ 13 $ (17) $ (26)
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