Dell 2003 Annual Report Download - page 44

Table of Contents
As of January 30, 2004, Dell had approximately 530 debt investment positions that had fair market values below their carrying values for a period of less than
12 months. The fair market value and unrealized losses on these investment positions totaled $2.5 billion and $12 million, respectively, as of January 30,
2004. The unrealized losses are due to changes in interest rates and are expected to be temporary in nature.
The following table summarizes Dell's recognized gains and losses on investments, including impairments of certain investments:
Fiscal Year Ended
January 30, January 31, February 1,
2004 2003 2002
(in millions)
Gains $ 94 $ 86 $ 185
Losses (78) (92) (462)
Net recognized gains (losses) $ 16 $ (6) $ (277)
The fiscal 2002 recognized loss on investments includes a $260 million charge incurred in the second quarter for other-than-temporary declines in fair value
of Dell's venture investments due to market conditions.
Dell routinely enters into securities lending agreements with financial institutions in order to enhance investment income. Dell requires that the loaned
securities be collateralized in the form of cash or securities for values which generally exceed the value of the loaned security. As of January 30, 2004 there
were no securities on loan with financial institutions.
Foreign Currency Instruments
Dell uses purchased option contracts and forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in its
forecasted transactions denominated in currencies other than the U.S. dollar. Hedged transactions include international sales by U.S. dollar functional
currency entities, foreign currency denominated purchases of certain components and intercompany shipments to some international subsidiaries. The risk of
loss associated with purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal
to the exchange rate differential from the time the contract is entered into until the time it is settled. These contracts generally expire in twelve months or less.
Dell also uses forward contracts to hedge monetary assets and liabilities, primarily receivables and payables, denominated in a foreign currency. These
contracts are not designated as hedging instruments under GAAP, and therefore, the change in the instrument's fair value is recognized currently in earnings
and is reported as a component of investment and other income (loss), net. The change in the fair value of these instruments represents a natural hedge as their
gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates. These
contracts generally expire in three months or less.
If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative is initially deferred in other
comprehensive income. These amounts are subsequently recognized in income as a component of net revenue or cost of revenue in the same period the
hedged transaction affects earnings. The ineffective portion of the change in the fair value of cash flow hedge is recognized currently in earnings and is
reported as a component of investment and other income (loss), net. Hedge effectiveness is measured by comparing the hedging instrument's cumulative
change in fair value from inception to maturity to the forecasted transaction's terminal value. During fiscal years 2004 and 2003, Dell did not discontinue any
cash flow hedges as substantially all forecasted foreign currency transactions were realized in Dell's actual results. Furthermore, hedge ineffectiveness was not
material.
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