Electronic Arts 2010 Annual Report Download - page 139

Annual Report
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 consists 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 foreign currency 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. The gross amount of the effective portion of gains or losses resulting from
changes in fair value of these hedge is subsequently reclassified into net revenue or research and development
expenses, as appropriate in the period when the forecasted transaction is recognized in our Consolidated
Statements of Operations. In the event that the gains or losses in accumulated other comprehensive income are
deemed to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is
reclassified to interest and other income, net, in our Consolidated Statements of Operations. In the event that the
underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined
hedge period, the gains or losses on the related cash flow hedges are reclassified from accumulated other
comprehensive income to interest and other income, net, on 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 net revenue and research and development expenses. As of March 31, 2010, we had foreign
currency option contracts to purchase approximately $18 million in foreign currency and to sell approximately
$30 million of foreign currencies. All of the foreign currency option contracts outstanding as of March 31, 2010
will mature in the next 12 months. 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, 2010 and 2009, these foreign currency option contracts outstanding had a total fair value of $2 million
in each year and are 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 monetary assets and liabilities, primarily intercompany
receivables and payables. The foreign currency forward contracts generally have a contractual term of three
months or less and are transacted near month-end. Our foreign currency forward contracts are not designated as
hedging instruments, and are accounted for as derivatives whereby the fair value of the contracts is reported as
other current assets or other current liabilities in our Consolidated Balance Sheets, and gains and losses from
changes in fair value are reported in interest and other income, net, in our Consolidated Statements of Operations.
The gains and losses on these foreign currency forward contracts generally offset the gains and losses on the
underlying foreign-currency-denominated monetary assets and liabilities, which are also reported in interest and
other income, net, in our Consolidated Statements of Operations. In certain cases, the amount of such gains and
losses will significantly differ from the amount of gains and losses recognized on the underlying foreign-
currency-denominated monetary asset or liability, in which case our results will be impacted. As of March 31,
2010, we had foreign currency forward contracts to purchase and sell approximately $431 million in foreign
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