Yahoo 2013 Annual Report Download - page 72

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Foreign Currency Exposure
The objective of our foreign exchange risk management program is to identify material foreign currency
exposures and identify methods to manage these exposures to minimize the potential effects of currency
fluctuations on our reported consolidated cash flows and results of operations. Counterparties to our derivative
contracts are all major institutions.
We transact business in various foreign currencies and have international revenue, as well as costs denominated
in foreign currencies. This exposes us to the risk of fluctuations in foreign currency exchange rates.
We had net realized and unrealized foreign currency transaction losses of $6 million for the year ended
December 31, 2013. We had net realized and unrealized foreign currency transaction losses of $1 million and
gains of $9 million for the years ended December 31, 2012 and 2011, respectively.
We categorize our foreign currency exposure as follows: (1) net investment, (2) cash flow, (3) balance sheet,
(4) forecasted revenue and (5) translation.
Net Investment Exposure. We hedge, on an after-tax basis, a portion of our net investment in Yahoo Japan with
forward contracts to reduce the risk that the carrying value of our investment in Yahoo Japan will be adversely
affected by foreign currency exchange rate fluctuations. At inception, the forward contracts had maturities
ranging from 9 to 15 months. If the Japanese yen appreciates at maturity from the forward contract execution
rates, the forward contracts will require us to pay a cash settlement, which may be material. If the Japanese yen
depreciates at maturity from the forward contract execution rates, we will receive a cash settlement, which may
be material. We apply net investment hedge accounting and expect the hedges to be effective, allowing changes
in fair value of the derivative instrument to be recorded in accumulated other comprehensive income on our
consolidated balance sheets. The notional amounts of the foreign currency forward contracts related to our net
investment hedge were $3 billion and $1.3 billion as of December 31, 2012 and 2013, respectively. The fair
values of the foreign currency forward contracts were a $3 million asset and a $209 million asset as of
December 31, 2012 and 2013, respectively, and were included in prepaid expenses and other current assets on
our consolidated balance sheets. Pre-tax gains of $3 million and $510 million were recorded for the year ended
December 31, 2012 and December 31, 2013, respectively, and were included in accumulated other
comprehensive income on our consolidated balance sheets. We received $304 million in cash for settlement of
certain foreign currency forward contracts during the year ended December 31, 2013. We did not enter into any
net investment hedges in the year ended December 31, 2011.
Cash Flow Exposure. We have entered into foreign currency forward contracts designated as cash flow hedges of
varying maturities through July 31, 2014. For derivatives designated as cash flow hedges, the effective portion of
the unrealized gains or losses on these forward contracts is recorded in accumulated other comprehensive income
on our consolidated balance sheets and reclassified into revenue on the consolidated statements of income when
the underlying hedged revenue is recognized. If the cash flow hedges were to become ineffective, the ineffective
portion would be immediately recorded in other income, net on our consolidated statements of income. The cash
flow hedges were considered to be effective as of December 31, 2013. The total notional amount of the foreign
currency forward contracts was $56 million as of December 31, 2013. The fair value of the foreign currency
forward contracts was a $4 million asset as of December 31, 2013, which was included in prepaid expenses and
other current assets on our consolidated balance sheets. A pre-tax net gain of $2 million was recorded as of
December 31, 2013, which was included in accumulated other comprehensive income on our consolidated
balance sheets. For year ended December 31, 2013, we recorded gains of $2 million, net of tax, for cash flow
hedges, which were recorded in revenue in the consolidated statements of income. We received $2 million in
cash for settlement of certain foreign currency forward contracts during the year ended December 31, 2013. We
did not enter into any cash flow hedges in the years ended December 31, 2012 and 2011.
Balance Sheet Exposure. We hedge certain of our net recognized foreign currency assets and liabilities with
foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected
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