Electronic Arts 2006 Annual Report Download - page 153

(3) DERIVATIVE FINANCIAL INSTRUMENTS
We account for our derivative and hedging activities under SFAS No. 133. The assets or liabilities
associated with our derivative instruments and hedging activities are recorded at fair value in other current
assets or other current liabilities, respectively, in our Consolidated Balance Sheet. As discussed below, the
accounting for gains and losses resulting from changes in fair value depends on the use of the derivative
and whether it is designated and qualiÑes for hedge accounting.
We transact business in various foreign currencies and have signiÑcant international sales and expenses
denominated in foreign currencies, subjecting us to foreign currency risk. Our policy is to purchase foreign
currency option contracts, generally with maturities of 15 months or less, to reduce the volatility of cash
Öows primarily related to forecasted revenue and expenses denominated in certain foreign currencies. In
addition, we utilize foreign exchange forward contracts to mitigate foreign currency exchange rate 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. We do not use foreign currency option or foreign exchange forward contracts for
speculative or trading purposes.
Cash Flow Hedging Activities
Our foreign currency option contracts are designated and qualify as cash Öow hedges under
SFAS No. 133. The eÅectiveness of the cash Öow hedge contracts, including time value, is assessed
monthly using regression as well as other timing and probability criteria required by SFAS No. 133. To
receive hedge accounting treatment, all hedging relationships are formally documented at the inception of
the hedge and the hedges must be highly eÅective in oÅsetting changes to future cash Öows on hedged
transactions. 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. The gross amount of the eÅective portion of gains or losses resulting from changes in fair value of
these hedges is subsequently reclassiÑed into net revenue or operating expenses, as appropriate, in the
period when the forecasted transaction is recorded in the Consolidated Statements of Operations. 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 Statements of Operations. The eÅective portion of
hedges recognized in accumulated other comprehensive income at the end of each year will be reclassiÑed
to earnings within 12 months.
The following table summarizes the activity in accumulated other comprehensive income, net of related
Annual Report
taxes, with regard to the changes in fair value of derivative instruments, for Ñscal 2006 and 2005 (in
millions):
Year Ended
March 31,
2006 2005
Beginning balance of unrealized gains (losses), net, on derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì
Change in unrealized gains (losses), net, on derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 Ì
ReclassiÑcation adjustment for (gains) losses, realized on derivative instruments to net
income, net:
Net revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4) Ì
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì
Ending balance of unrealized gains (losses), net, on derivative instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì
Hedging ineÅectiveness for the year ended March 31, 2006 was not signiÑcant. The amount of hedging
ineÅectiveness recognized in interest and other income, net was a loss of $1 million and $2 million for the
years ended March 31, 2005 and 2004, respectively.
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