Electronic Arts 2006 Annual Report Download - page 135

assets associated with our hedging activities are recorded at fair value in other current assets in our
Consolidated Balance Sheet. The eÅective portion of gains or losses resulting from changes in fair value of
these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income
in stockholders' equity and subsequently reclassiÑed into net revenue or operating expenses, as appropriate
in the period when the forecasted transaction is recorded. The ineÅective portion of gains or losses
resulting from changes in fair value, if any, is reported in each period in interest and other income, net in
our Consolidated Statement of Operations. Our hedging programs reduce, but do not entirely eliminate,
the impact of currency exchange rate movements in revenue and operating expenses. As of March 31,
2006, we had no foreign currency option contracts outstanding. As of March 31, 2005, we had foreign
currency option contracts outstanding with a total fair value of $1 million included in other current assets.
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 approximately 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 our Consolidated Balance Sheet, and gains and losses from changes in fair
value are reported in interest and other income, net. The gains and losses on these forward contracts
generally oÅset the gains and losses on the underlying foreign-currency-denominated assets and liabilities,
which are also reported in interest and other income, net, in our Consolidated Statement of Operations.
As of March 31, 2006, we had forward foreign exchange contracts to purchase and sell approximately
$161 million in foreign currencies. Of this amount, $132 million represented contracts to sell foreign
currencies in exchange for U.S. dollars, $14 million to sell foreign currencies in exchange for British pound
sterling and $15 million to purchase foreign currency in exchange for U.S. dollars. As of March 31, 2005
we had forward foreign exchange contracts to purchase and sell approximately $425 million of foreign
currencies. Of this amount, $379 million represented contracts to sell foreign currencies in exchange for
U.S. dollars, $22 million to sell foreign currencies in exchange for British pound sterling and $24 million to
purchase foreign currency in exchange for U.S. dollars. The fair value of our forward contracts was
immaterial as of March 31, 2006 and March 31, 2005.
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
Annual Report
assurances that our hedging activities will adequately protect us against the risks associated with foreign
currency Öuctuations. As of March 31, 2006, we had no foreign currency option contracts outstanding. As
of March 31, 2005, a hypothetical adverse foreign currency exchange rate movement of 10 percent or
15 percent would not have resulted in a material loss in fair value of our option contracts under either
scenario. However, a hypothetical adverse foreign currency exchange rate movement of 10 percent or
15 percent would result in potential losses on our forward contracts of $16 million and $23 million,
respectively, as of March 31, 2006, and $40 million and $61 million, respectively, as of March 31, 2005.
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 maturities. Additionally, the contractual terms
of the securities do not permit the issuer to call, prepay or otherwise settle the securities at prices less than
the stated par value of the securities. Our investments are held for purposes other than trading. Also, we
do not use derivative Ñnancial instruments or leverage in our short-term investment portfolio.
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