Electronic Arts 2004 Annual Report Download - page 83

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currency risk associated with foreign currency denominated assets and liabilities, primarily certain
intercompany receivables and payables. We do not use option or forward exchange contracts for speculative or
trading purposes.
Balance Sheet Activities
For accounting purposes, we do not designate our foreign currency forward contracts (which are intended to
hedge against changes in the value of assets and liabilities denominated in currencies other than the entity's
functional currency) as hedging instruments under SFAS 133. As a result, we mark to market our foreign
currency forward contracts each period and any gains or losses are recognized in interest and other income,
net, in the Consolidated Statements of Operations. However, U.S. GAAP also requires us to mark to market
asset and liabilities that are denominated in currencies other than the entity's functional currency with the
corresponding gains or losses also being recognized in interest and other income, net. As a result, the gains or
losses on these assets and liabilities generally oÅset the gains or losses recorded on our foreign currency
forward contracts.
As of March 31, 2004, we had foreign exchange contracts, all with maturities of less than three months, to
purchase and sell approximately $189.6 million in foreign currencies, primarily in British Pounds, European
Currency Units (""Euros'') and Japanese Yen.
As of March 31, 2004, the fair value of foreign currency forward contracts was $1.7 million and was recorded
in other current assets on our Consolidated Balance Sheet. The counterparties to these contracts are
creditworthy multinational commercial banks. The risks of counterparty nonperformance associated with
these contracts are not considered to be material. Notwithstanding our eÅorts to manage foreign exchange
risk, there can be no assurances that our mitigating or hedging activities will adequately protect us against the
risks associated with foreign currency Öuctuations.
Cash Flow Hedge Activities
Our foreign currency option contracts are designated and qualify as cash Öow hedges. The fair value of the
eÅective portion of a derivative's gain or loss is initially reported as a component of accumulated other
comprehensive income (loss) and subsequently reclassiÑed into net revenue when the forecasted transaction
impacts earnings. We exclude the fair value of the hedge at the date of inception and the subsequent changes
in the value of the hedge due to the passage of time (amortization) from our assessment of hedge
eÅectiveness and report these amounts in the Consolidated Statement of Operations in interest and other
income, net. These currency option contracts generally have maturities of less than 15 months. During Ñscal
2004, we recognized a loss of $1.6 million which was excluded from our assessment of cash Öow hedge
eÅectiveness. We did not enter into any foreign currency option contracts prior to Ñscal 2004. As all originally
forecasted transactions either occurred or continued to be probable of occurring, we did not discontinue
hedge accounting treatment for any foreign currency option contracts designated and qualifying as cash Öow
hedges and accordingly, have not reclassiÑed any gains or losses to earnings.
(4) BUSINESS COMBINATIONS
Square Co., Ltd.
In May 1998, we completed the formation of two new joint ventures in North America and Japan with Square
Co., Ltd. (""Square''), a leading developer and publisher of entertainment software in Japan. In North
America, the companies formed Square Electronic Arts, LLC (""Square EA''), which had exclusive
publishing rights in North America for future interactive entertainment titles created by Square. Additionally,
we had the exclusive right to distribute in North America products published by this joint venture. We
contributed $3.0 million and owned a 30 percent minority interest in this joint venture while Square owned
70 percent. This joint venture was accounted for under the equity method. The joint venture agreements with
Square expired as of March 31, 2003. Our distribution of Square products in North America terminated on
June 30, 2003. On May 30, 2003, Square acquired our 30 percent ownership interest in the joint venture for
$8.5 million and the investment was removed from our Consolidated Balance Sheet.
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