Electronic Arts 2012 Annual Report Download - page 143

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 (expense), 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 (expense), 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 (expense), 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, 2012, we had foreign currency option contracts to
purchase approximately $74 million in foreign currency and to sell approximately $78 million of foreign
currency. All of the foreign currency option contracts outstanding as of March 31, 2012 will mature in the next
12 months. 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 currencies. As of March 31, 2012,
these foreign currency option contracts outstanding had a total fair value of $2 million and are included in other
current assets. As of March 31, 2011, 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 (expense), 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 (expense), net, in our Consolidated Statements of
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