Yahoo 2013 Annual Report Download - page 73

by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities,
including intercompany transactions, which are denominated in foreign currencies. We recognize balance sheet
derivative instruments as either an asset or a liability on our consolidated balance sheets at fair value. Changes in
the fair value of these derivatives are recorded in other income, net on our consolidated statements of income.
These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements
because gains and losses on these derivatives are intended to offset gains or losses on the assets and liabilities
being hedged. The notional amounts of the foreign currency forward contracts were $356 million and $393
million as of December 31, 2012 and 2013, respectively. As of December 31, 2012, the fair value of the foreign
currency forward contracts was a $5 million liability, which was included in accrued expenses and other current
liabilities on our consolidated balance sheets. As of December 31, 2013, the fair value of the foreign currency
forward contracts was a less than $1 million net liability; the contracts’ fair value was included in accrued
expenses and other current liabilities and prepaid expenses and other current assets on our consolidated balance
sheets. A loss of $3 million, a gain of $4 million, and a loss of $12 million were recorded for the years ended
December 31, 2011, 2012, and 2013, respectively, and were included in other income, net on our consolidated
statements of income. We received $7 million and paid $17 million in cash for settlement of certain foreign
currency forward contracts during the years ended December 31, 2012 and 2013, respectively.
Forecasted Revenue Exposure. On October 2, 2013, we began hedging a portion of the forecasted revenue of
international subsidiaries where the functional currencies are the Euro, Australian dollar and British pound. This
program attempts to reduce the risk that our revenue denominated in these currencies will be adversely affected
by foreign currency exchange rate fluctuations. These derivatives are economic hedges and as such do not qualify
for hedge accounting. We recognize these derivative instruments as either assets or liabilities on our consolidated
balance sheets at fair value. Changes in the fair value of these derivatives are recorded as a component of revenue
in our consolidated statements of income and were not material for the year ended December 31, 2013. We did
not have any derivative contracts related to the forecasted revenue hedge outstanding as of December 31, 2013.
We did not enter into any forecasted revenue hedges in the years ended December 31, 2012 and 2011.
Translation Exposure. We are also exposed to foreign exchange rate fluctuations as we convert the financial
statements of our foreign subsidiaries and our investments in equity interests into U.S. dollars in consolidation. If
there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial
statements into U.S. dollars results in a gain or loss which is recorded as a component of accumulated other
comprehensive income which is part of stockholders’ equity.
A Value-at-Risk (“VaR”) sensitivity analysis was performed on all of our foreign currency derivative positions
as of December 31, 2013 and December 31, 2012 to assess the potential impact of fluctuations in exchange
rates. The VaR model uses a Monte Carlo simulation to generate thousands of random price paths assuming
normal market conditions. The VaR is the maximum expected one day loss in fair value, for a given statistical
confidence level, to our foreign currency derivative positions due to adverse movements in rates. The VaR model
is used as a risk management tool and is not intended to represent either actual or forecasted losses. Based on the
results of the model using a 99 percent confidence interval, we estimate the maximum one-day loss in fair value
is $12 million and $28 million on the notional value of the net investment hedges at December 31, 2013 and
2012, respectively. The maximum one-day loss in fair value is less than $1 million on the notional value of our
cash flow hedges at December 31, 2013. There were no cash flow hedges outstanding at December 31, 2012. The
maximum one-day loss in fair value is $2 million on the notional value of our balance sheet hedges at
December 31, 2013 compared to a $3 million loss and a $1 million loss at December 31, 2012 and 2011,
respectively.
Actual future gains and losses associated with our derivative positions may differ materially from the sensitivity
analysis performed as of December 31, 2013 due to the inherent limitations associated with predicting the timing
and amount of changes in foreign currency exchange rates and our actual exposures and positions. In addition,
the VaR sensitivity analysis may not reflect the complex market reactions that may arise from the market shifts
modeled within this VaR sensitivity analysis.
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