Google 2015 Annual Report Download - page 46

Table of Contents Alphabet Inc. and Google Inc.
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foreign exchange options before tax effect would have been approximately $686 million and $280 million lower as of
December 31, 2014 and December 31, 2015, and the total amount of expense recorded as other income (expense),
net, would have been approximately $90 million and $275 million higher in the years ended December 31, 2014 and
December 31, 2015. If the U.S. dollar strengthened by 20% as of December 31, 2014 and December 31, 2015, the
amount recorded in accumulated AOCI related to our foreign exchange options before tax effect would have been
approximately $2.5 billion and $3.1 billion higher as of December 31, 2014 and December 31, 2015, and the total
amount of expense recorded as other income (expense), net, would have been approximately $164 million and $372
million higher in the years ended December 31, 2014 and December 31, 2015. In both scenarios, the change in the
intrinsic value would be expected to offset a corresponding foreign currency change in forecasted hedged revenues
when recognized.
In addition, we use foreign exchange forward contracts to offset the foreign exchange risk on our assets and
liabilities denominated in currencies other than the local currency of the subsidiary. These forward contracts reduce,
but do not entirely eliminate the impact of currency exchange rate movements on our assets and liabilities. The foreign
currency gains and losses on the assets and liabilities are recorded in other income (expense), net, which are offset
by the gains and losses on the forward contracts.
We considered the historical trends in currency exchange rates and determined that it was reasonably possible
that adverse changes in exchange rates of 20% for all currencies could be experienced in the near term. These
reasonably possible adverse changes in exchange rates of 20% were applied to total monetary assets and liabilities
denominated in currencies other than the local currencies at the balance sheet dates to compute the adverse impact
these changes would have had on our income before income taxes in the near term. These changes would have
resulted in an adverse impact on income before income taxes of approximately $93 million and $122 million as of
December 31, 2014 and December 31, 2015. The adverse impact as of December 31, 2014 and December 31, 2015
is after consideration of the offsetting effect of approximately $948 million and $1.1 billion from foreign exchange
contracts in place for the months of December 31, 2014 and December 31, 2015.
Interest Rate Risk
Our investment strategy is to achieve a return that will allow us to preserve capital and maintain liquidity
requirements. We invest primarily in debt securities including those of the U.S. government and its agencies, corporate
debt securities, agency mortgage-backed securities, money market and other funds, municipal securities, time deposits,
asset backed securities, and debt instruments issued by foreign governments. By policy, we limit the amount of credit
exposure to any one issuer. Our investments in both fixed rate and floating rate interest earning securities carry a
degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than predicted if interest rates fall. As of December
31, 2014 and December 31, 2015, unrealized losses on our marketable debt securities were primarily due to temporary
interest rate fluctuations as a result of higher market interest rates compared to interest rates at the time of purchase.
We account for both fixed and variable rate securities at fair value with changes on gains and losses recorded in AOCI
until the securities are sold. We use interest rate derivative contracts to hedge gains and losses on our securities.
These derivative contracts are accounted for as hedges at fair value with changes in fair value recorded in other income
(expense), net.
We considered the historical volatility of short-term interest rates and determined that it was reasonably possible
that an adverse change of 100 basis points could be experienced in the near term. A hypothetical 1.00% (100 basis
points) increase in interest rates would have resulted in a decrease in the fair value of our marketable securities of
approximately $1.2 billion and $1.3 billion as of December 31, 2014 and December 31, 2015.