Cisco 2015 Annual Report Download - page 50

Our Level 2 securities are valued using quoted market prices for similar instruments or nonbinding market prices that are
corroborated by observable market data. We use inputs such as actual trade data, benchmark yields, broker/dealer quotes, and
other similar data, which are obtained from independent pricing vendors, quoted market prices, or other sources to determine the
ultimate fair value of our assets and liabilities. We use such pricing data as the primary input, to which we have not made any
material adjustments during fiscal 2015 and 2014, to make our assessments and determinations as to the ultimate valuation of our
investment portfolio. We are ultimately responsible for the financial statements and underlying estimates.
The inputs and fair value are reviewed for reasonableness, may be further validated by comparison to publicly available
information, and could be adjusted based on market indices or other information that management deems material to its estimate
of fair value. The assessment of fair value can be difficult and subjective. However, given the relative reliability of the inputs we
use to value our investment portfolio, and because substantially all of our valuation inputs are obtained using quoted market
prices for similar or identical assets, we do not believe that the nature of estimates and assumptions affected by levels of
subjectivity and judgment was material to the valuation of the investment portfolio as of July 25, 2015. Level 3 assets do not
represent a significant portion of our total assets measured at fair value on a recurring basis as of July 25, 2015 and July 26, 2014.
Other-than-Temporary Impairments
We recognize an impairment charge when the declines in the fair values of our fixed income or publicly traded equity securities
below their cost basis are judged to be other than temporary. The ultimate value realized on these securities, to the extent
unhedged, is subject to market price volatility until they are sold.
If the fair value of a debt security is less than its amortized cost, we assess whether the impairment is other than temporary. An
impairment is considered other than temporary if (i) we have the intent to sell the security, (ii) it is more likely than not that we
will be required to sell the security before recovery of its entire amortized cost basis, or (iii) we do not expect to recover the entire
amortized cost of the security. If an impairment is considered other than temporary based on (i) or (ii) described in the prior
sentence, the entire difference between the amortized cost and the fair value of the security is recognized in earnings. If an
impairment is considered other than temporary based on condition (iii), the amount representing credit loss, defined as the
difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security,
will be recognized in earnings, and the amount relating to all other factors will be recognized in other comprehensive income
(OCI). In estimating the amount and timing of cash flows expected to be collected, we consider all available information,
including past events, current conditions, the remaining payment terms of the security, the financial condition of the issuer,
expected defaults, and the value of underlying collateral.
For publicly traded equity securities, we consider various factors in determining whether we should recognize an impairment
charge, including the length of time and extent to which the fair value has been less than our cost basis, the financial condition
and near-term prospects of the issuer, and our intent and ability to hold the investment for a period of time sufficient to allow for
any anticipated recovery in market value.
There were no impairment charges on our investments in publicly traded equity securities in fiscal 2015 and 2013, and we
recognized $11 million of such impairment charges in earnings for fiscal 2014. There were no impairment charges on our
investments in fixed income securities in fiscal 2015, 2014, and 2013. Our ongoing consideration of all the factors described
previously could result in additional impairment charges in the future, which could adversely affect our net income.
We also have investments in privately held companies, some of which are in the startup or development stages. As of July 25,
2015, our investments in privately held companies were $897 million, compared with $899 million as of July 26, 2014, and were
included in other assets. We monitor these investments for events or circumstances indicative of potential impairment, and we
make appropriate reductions in carrying values if we determine that an impairment charge is required, based primarily on the
financial condition and near-term prospects of these companies. These investments are inherently risky because the markets for
the technologies or products these companies are developing are typically in the early stages and may never materialize. Our
impairment charges on investments in privately held companies were $41 million, $23 million, and $33 million in fiscal 2015,
2014, and 2013, respectively.
Goodwill and Purchased Intangible Asset Impairments
Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation
techniques. Goodwill represents a residual value as of the acquisition date, which in most cases results in measuring goodwill as
an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquired company over
the fair value of net assets acquired, including contingent consideration. We perform goodwill impairment tests on an annual
basis in the fourth fiscal quarter and between annual tests in certain circumstances for each reporting unit. The assessment of fair
value for goodwill and purchased intangible assets is based on factors that market participants would use in an orderly transaction
in accordance with the new accounting guidance for the fair value measurement of nonfinancial assets.
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