Electronic Arts 2011 Annual Report Download - page 131

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 on our Consolidated Balance Sheets. The effective portion of gains or losses resulting from changes in the
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 the fair value of these hedges 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, in our Consolidated Statements of Operations. During the reporting periods, all
forecasted transactions occurred and, therefore, there were no such gains or losses reclassified into interest and other
income, net. 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, 2011, we had
foreign currency option contracts to purchase approximately $40 million in foreign currency and to sell
approximately $10 million of foreign currency. All of the foreign currency option contracts outstanding as of
March 31, 2011 will mature in the next 12 months. 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. As of March 31, 2011 and 2010, the fair value of these outstanding foreign currency option contracts
was immaterial 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 accrued and other current liabilities on our Consolidated Balance Sheets, and gains and
losses resulting from changes in the 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, 2011, we had foreign currency forward contracts to purchase and sell approximately $187
million in foreign currencies. Of this amount, $140 million represented contracts to sell foreign currencies in
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