Electronic Arts 2012 Annual Report Download - page 165

Annual Report
(4) DERIVATIVE FINANCIAL INSTRUMENTS
The assets or liabilities associated with our derivative instruments and hedging activities are recorded at fair
value in other current assets or accrued and other current liabilities, respectively, on our Consolidated Balance
Sheets. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on
the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.
We transact business in various foreign currencies and have significant international sales and expenses
denominated in foreign currencies, subjecting us to foreign currency risk. We purchase foreign currency option
contracts, generally with maturities of 15 months or less, to reduce the volatility of cash flows primarily related to
forecasted revenue and expenses denominated in certain foreign currencies. Our cash flow risks are primarily
related to fluctuations in the Euro, British pound sterling and Canadian dollar. In addition, we utilize foreign
currency forward contracts to mitigate foreign exchange rate 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 approximately three months or less and are transacted near month-
end. At each quarter-end, the fair value of the foreign currency forward contracts generally is not significant. We do
not use foreign currency option or foreign currency forward contracts for speculative or trading purposes.
Cash Flow Hedging Activities
Our foreign currency option contracts are designated and qualify as cash flow hedges. The effectiveness of the
cash flow hedge contracts, including time value, is assessed monthly using regression analysis, as well as other
timing and probability criteria. To qualify for hedge accounting treatment, all hedging relationships are formally
documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows
on hedged transactions. 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. 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.
The effect of the gains and losses from our foreign currency option contracts in our Consolidated Statements of
Operations for the fiscal years ended March 31, 2012, 2011 and 2010 were immaterial.
Balance Sheet Hedging Activities
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
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