Intel 2006 Annual Report Download - page 66

Table of Contents
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is
other than temporarily impaired, in which case the investment is written down to its impaired value and a new cost basis is
established. For investments in non-marketable equity securities that are not considered viable from a financial or
technological point of view, the entire investment is written down, since the estimated fair value is considered to be nominal.
Impairment charges are recorded in gains (losses) on equity securities, net for equity investments or in interest and other, net
for debt security investments.
Fair Values of Financial Instruments
The carrying value of cash equivalents approximates fair value due to the short period of time to maturity. Fair values of short-
term investments, trading assets, long-term investments, marketable strategic equity securities, certain non-marketable
investments, short-term debt, long-term debt, swaps, currency forward contracts, currency options, equity options, and
warrants are based on quoted market prices or pricing models using current market data when available. Debt securities are
generally valued using discounted cash flows in a yield-curve model based on LIBOR. Equity options and warrants are priced
using option pricing models. The company’s financial instruments are recorded at fair value or amounts that approximate fair
value except for cost basis loan participation notes and debt. Estimated fair values are management’s estimates; however,
when there is no readily available market data, the estimated fair values may not necessarily represent the amounts that could
be realized in a current transaction, and these fair values could change significantly.
For certain non-marketable investments, such as non-marketable equity securities, management believes that the carrying
value of the portfolio approximated the fair value at December 30, 2006 and December 31, 2005. For the company’
s cost basis
loan participation notes, the fair value exceeds the carrying value by approximately $55 million as of December 30, 2006.
Management believes that the carrying value of the cost basis loan participation notes approximated fair value as of
December 31, 2005. These fair value estimates take into account the movements of the equity and venture capital markets as
well as changes in the interest rate environment, and other economic variables.
The carrying value of the company’s long-term debt was $1.8 billion, and management believes that the fair value was
approximately $1.7 billion as of December 30, 2006. Management believes that the carrying value of the company’s long-
term
debt approximated fair value as of December 31, 2005. These fair value estimates take into consideration credit rating
changes, equity price movements, interest rate changes, and other economic variables.
Derivative Financial Instruments
The company’s primary objective for holding derivative financial instruments is to manage currency, interest rate, and certain
equity market risks. The company’
s derivative financial instruments are recorded at fair value and are included in other current
assets, other long-term assets, other accrued liabilities, or other long-term liabilities. Derivative instruments recorded as assets
totaled $117 million at December 30, 2006 ($87 million at December 31, 2005). Derivative instruments recorded as liabilities
totaled $62 million at December 30, 2006 ($65 million at December 31, 2005). The company’s accounting policies for these
instruments are based on whether they meet the criteria for designation as cash flow or fair value hedges. A hedge of the
exposure to variability in the future cash flows of an asset or a liability, or of a forecasted transaction, is referred to as a cash
flow hedge. A designated hedge of the exposure to changes in fair value of an asset or a liability, or of an unrecognized firm
commitment, is referred to as a fair value hedge. The criteria for designating a derivative as a hedge include the assessment of
the instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction, and the
probability of occurrence of the underlying transaction. Gains and losses from changes in fair values of derivatives that are not
designated as hedges for accounting purposes are recognized within the same line item on the consolidated statements of
income as the underlying item, and generally offset changes in fair values of related assets or liabilities.
As part of its strategic investment program, the company also acquires equity derivative instruments, such as warrants and
equity conversion rights associated with debt instruments, which are not designated as hedging instruments. The gains or
losses from changes in fair values of these equity instrument derivatives are recognized in gains (losses) on equity securities,
net.
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Marketable debt securities
when a significant decline in the issuer’s credit quality is likely to have a significant
adverse effect on the fair value of the investment.