Apple (AAPL)

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Summary of Significant Accounting Policies (Continued)

hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings.

For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the net gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income in shareholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges, the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. For forward contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this component are recognized in current earnings.

The Company may enter into foreign currency forward contracts to hedge the translation and economic exposure of a net investment position in a foreign subsidiary. For such contracts, hedge effectiveness is measured based on changes in the fair value of the contract attributable to changes in the spot exchange rate. The effective portion of the net gain or loss on a derivative instrument designated as a hedge of the net investment position in a foreign subsidiary is reported in the same manner as a foreign currency translation adjustment. Any residual changes in fair value of the forward contract, including changes in fair value based on the differential between the spot and forward exchange rates, are recognized in current earnings in other income and expense.

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 1—Summary
of Significant Accounting Policies (Continued)

hedged assets,
liabilities, or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings.

For derivative instruments that hedge the exposure to
variability in expected future cash flows that are designated as cash flow
hedges, the net gain or loss on the derivative instrument is reported as a
component of accumulated other comprehensive income in shareholders’ equity and
reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. To receive hedge accounting treatment,
cash flow hedges must be highly effective in offsetting changes to expected
future cash flows on hedged transactions. For derivative instruments that hedge
the exposure to changes in the fair value of an asset or a liability and that
are designated as fair value hedges, the net gain or loss on the derivative
instrument as well as the offsetting gain or loss on the hedged item
attributable to the hedged risk are recognized in earnings in the current
period. The net gain or loss on the effective portion of a derivative
instrument that is designated as an economic hedge of the foreign currency
translation exposure of the net investment in a foreign operation is reported
in the same manner as a foreign currency translation adjustment. For forward
contracts designated as net investment hedges, the Company excludes changes in
fair value relating to changes in the forward carry component from its
definition of effectiveness. Accordingly, any gains or losses related to this
component are recognized in current earnings.

The Company may enter into
foreign currency forward contracts to hedge the translation and economic
exposure of a net investment position in a foreign subsidiary. For such
contracts, hedge effectiveness is measured based on changes in the fair value
of the contract attributable to changes in the spot exchange rate. The
effective portion of the net gain or loss on a derivative instrument designated
as a hedge of the net investment position in a foreign subsidiary is reported
in the same manner as a foreign currency translation adjustment. Any residual
changes in fair value of the forward contract, including changes in fair value
based on the differential between the spot and forward exchange rates, are
recognized in current earnings in other income and expense.