eBay 2006 Annual Report Download - page 67

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Equity Price Risk
We are exposed to equity price risk on the marketable portion of equity instruments and equity method
investments we hold, typically as the result of strategic investments in third parties that are subject to considerable
market risk due to their volatility. We typically do not attempt to reduce or eliminate our market exposure in these
equity investments. We did not record an impairment charge during the years ended December 31, 2006, 2005 or
2004 relating to the other-than-temporary impairment in the fair value of equity investments. At December 31,
2006, the total carrying value of our equity instruments and equity method investments was $65.5 million.
Foreign Currency Risk
International net revenues result from transactions by our foreign operations and are typically denominated in
the local currency of each country. These operations also incur most of their expenses in the local currency.
Accordingly, certain foreign operations use the local currency, which is primarily the Euro, and to a lesser extent,
the British pound, as their functional currency. Our international operations are subject to risks typical of
international operations, including, but not limited to, differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our
future results could be materially adversely impacted by changes in these or other factors. In addition, at
December 31, 2006, we held balances in cash, cash equivalents and investments outside the U.S. totaling
approximately $2.3 billion.
Transaction Exposure
As of December 31, 2006, we had outstanding forward foreign exchange hedge contracts with notional values
equivalent to approximately $188.4 million with maturity dates within 31 days. The hedge contracts are used to
offset changes in the functional currency value of assets and liabilities denominated in foreign currencies as a result
of currency fluctuations. Transaction gains and losses on the contracts and the assets and liabilities are recognized
each period in our consolidated statement of income.
Translation Exposure
Foreign exchange rate fluctuations may adversely impact our financial position as the assets and liabilities of
our foreign operations are translated into U.S. dollars in preparing our consolidated balance sheet. The effect of
foreign exchange rate fluctuations on our consolidated financial position for the year ended December 31, 2006,
was a net translation gain of approximately $588.2 million. This gain is recognized as an adjustment to
stockholders’ equity through accumulated other comprehensive income. Additionally, foreign exchange rate
fluctuations may adversely impact our consolidated results of operations as exchange rate fluctuations on
transactions denominated in currencies other than our functional currencies result in gains and losses that are
reflected in our consolidated statement of income.
We consolidate the earnings of our international subsidiaries by converting them into U.S. dollars in
accordance with SFAS No. 52 “Foreign Currency Translation” (FAS 52). Such earnings will fluctuate when there
is a change in foreign currency exchange rates. We enter into transactions to hedge portions of our foreign currency
denominated earnings translation exposure using either forward exchange contracts or other instruments. All
contracts that hedge translation exposure mature ratably over the quarter in which they are executed. During the
year ended December 31, 2006, the realized gains and losses related to these hedges were not significant.
A hypothetical uniform 10% strengthening or weakening in the value of the U.S. dollar relative to the Euro,
British pound and Korean won in which our revenues and profits are denominated would result in a decrease/
increase to operating income of approximately $110 million. There are inherent limitations in the sensitivity
analysis presented, primarily due to the assumption that foreign exchange rate movements are linear and
instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex market changes
that could arise, which may positively or negatively affect income.
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