Electronic Arts 2014 Annual Report Download - page 148

(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 forward
and 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, Canadian dollar, and Swedish
Krona. 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 not designated as hedging instruments
generally have a contractual term of approximately 3 months or less and are transacted near month-end. At each
quarter-end, the fair value of the foreign currency forward contracts is generally 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 and certain of our forward 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 derivative assets or liabilities associated with our hedging
activities are recorded at fair value in other current assets or accrued and other liabilities 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.
Total gross notional amounts and fair values for currency derivatives with cash flow hedge accounting
designation are as follows:
As of March 31, 2014 As of March 31, 2013
Notional
Amount
Fair Value Notional
Amount
Fair Value
Asset Liability Asset Liability
Option contracts to purchase ......................... $ — $— $— $ 84 $— $—
Forward contracts to purchase ........................ 179 — 3 — — —
Total .......................................... $179 $— $ 3 $ 84 $— $—
Option contracts to sell ............................. $ — $— $— $149 $ 6 $—
Forward contracts to sell ............................ 363 — 2 — — —
Total .......................................... $363 $— $ 2 $149 $ 6 $—
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