Electronic Arts 2005 Annual Report Download - page 112

We utilize foreign exchange forward contracts to mitigate foreign currency risk associated with foreign
currency denominated assets and liabilities, primarily intercompany receivables and payables. The forward
contracts generally have a contractual term of less than one month and are transacted near month-end.
Therefore, the fair value of the forward contracts generally is not signiÑcant at each month-end. Our foreign
exchange forward contracts are not designated as hedging instruments under SFAS No. 133 and are
accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or other
current liabilities in the Consolidated Balance Sheets, and gains and losses from changes in fair value are
reported in interest and other income, net in the Consolidated Statements of Operations. The gains and losses
on these forward contracts generally oÅset the gains and losses on the underlying foreign-currency-
denominated assets and liabilities.
As of March 31, 2005 we had foreign exchange contracts to purchase and sell approximately $425 million of
foreign currencies. Of this amount, $379 million represents contracts to sell foreign currencies in exchange for
U.S. dollars, $22 million to sell foreign currencies in exchange for British Pounds, and $24 million to purchase
foreign currency in exchange for U.S. dollars. As of March 31, 2004 we had foreign exchange contracts to
purchase and sell approximately $190 million of foreign currencies. Of this amount, $173 million represented
contracts to sell foreign currencies in exchange for U.S. dollars and $17 million to sell foreign currency for
British Pounds. The fair value of our forward contracts was approximately $0 and $2 million as of March 31,
2005 and 2004, respectively.
The counterparties to these forward and option 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 mitigate some foreign currency exchange rate risks, there can be no assurances
that our mitigating activities will adequately protect us against the risks associated with foreign currency
Öuctuations. For example, a hypothetical adverse foreign currency exchange rate movement of 10 percent or
15 percent would not result in a material loss in fair value of our option contracts under either scenario as of
March 31, 2005 or 2004. A hypothetical adverse foreign currency exchange rate movement of 10 percent or
15 percent would result in potential losses on our forward contracts of $40 million and $61 million,
respectively, as of March 31, 2005, and $17 million and $26 million, respectively, as of March 31, 2004. This
sensitivity analysis assumes a parallel adverse shift in foreign currency exchange rates, which do not always
move in the same direction. Actual results may diÅer materially.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our short-term investment
portfolio. We manage our interest rate risk by maintaining an investment portfolio generally consisting of debt
instruments of high credit quality and relatively short average maturities. Additionally, the contractual terms
of the securities do not permit the issuer to call, prepay or otherwise settle the securities at prices less that the
stated par value of the securities. We also do not use derivative Ñnancial instruments in our short-term
investment portfolio.
As of March 31, 2005 and 2004, our short-term investments were classiÑed as available-for-sale and,
consequently, recorded at fair market value with unrealized gains or losses resulting from changes in fair value
reported as a separate component of accumulated other comprehensive income (loss), net of any tax eÅects,
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