Electronic Arts 2009 Annual Report Download - page 139

Annual Report
development functions. Our rental obligation under this agreement is $50 million over the initial ten-year term of
the lease. This commitment is offset by expected sublease income of $6 million for a sublease to an affiliate of
the Landlord of 18,000 square feet of the Los Angeles facility, which commenced in October 2003 and expires in
September 2013.
Director Indemnity Agreements
We entered into indemnification agreements with each of the members of our Board of Directors at the time they
joined the Board to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses,
amounts paid in settlement and damages incurred by the directors as a result of any lawsuit, or any judicial,
administrative or investigative proceeding in which the directors are sued or charged as a result of their service as
members of our Board of Directors.
INFLATION
We believe the impact of inflation on our results of operations has not been significant in any of the past three
fiscal years.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
We are exposed to various market risks, including changes in foreign currency exchange rates, interest rates and
market prices, which have experienced significant volatility in light of the global economic downturn. Market
risk is the potential loss arising from changes in market rates and market prices. We employ established policies
and practices to manage these risks. Foreign currency option and forward contracts are used to hedge anticipated
exposures or mitigate some existing exposures subject to foreign exchange risk as discussed below. While we do
not hedge our short-term investment portfolio, we protect our short-term investment portfolio against different
market risks, including interest rate risk as discussed below. Our cash and cash equivalents portfolio consist of
highly liquid investments with insignificant interest rate risk and original or remaining maturities of three months
or less at the time of purchase. We also do not currently hedge our market price risk relating to our marketable
equity securities and we do not enter into derivatives or other financial instruments for trading or speculative
purposes.
Foreign Currency Exchange Rate Risk
Cash Flow Hedging Activities. From time to time, we hedge a portion of our foreign currency risk related to
forecasted foreign-currency-denominated sales and expense transactions by purchasing option contracts that
generally have maturities of 15 months or less. These transactions are designated and qualify as cash flow
hedges. The derivative assets associated with our hedging activities are recorded at fair value in other current
assets in our Consolidated Balance Sheets. The effective 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 reclassified into net revenue or research and development
expenses, as appropriate in the period when the forecasted transaction is recorded. The ineffective 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. Our hedging programs are designed to reduce, but do not
entirely eliminate the impact of currency exchange rate movements in revenue and research and development
expenses. As of March 31, 2009, we had foreign currency option contracts to purchase approximately $19
million in foreign currency and to sell approximately $65 million of foreign currencies. As of March 31, 2009,
these foreign currency option contracts outstanding had a total fair value of $2 million, included in other current
assets. As of March 31, 2008, we had foreign currency option contracts to purchase approximately $48 million in
foreign currencies and to sell approximately $254 million of foreign currencies. As of March 31, 2008, these
foreign currency option contracts outstanding had a total fair value of $5 million, included in other current assets.
Balance Sheet Hedging Activities. We use foreign currency forward contracts to mitigate foreign currency risk
associated with foreign-currency-denominated assets and liabilities, primarily intercompany receivables and
59