NVIDIA 2011 Annual Report Download - page 43

Cash Equivalents and Marketable Securities
Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the
time of acquisition. Marketable securities consist primarily of highly liquid investments with maturities of greater than three months when purchased. We
generally classify our marketable securities at the date of acquisition as available- for- sale. These securities are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholder’s equity, net of tax. Any unrealized
losses which are considered to be other-than-temporary impairments are recorded in the other income (expense) section of our consolidated statements of
operations. Realized gains (losses) on the sale of marketable securities are determined using the specific-identification method and recorded in the other
income (expense) section of our consolidated statements of operations. Please refer to Note 18 of the Notes to the Consolidated Financial Statements in
Part IV, Item 15 of this Form 10-K. We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and
liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Our Level 1 assets
consist of our money market funds. We classify securities within Level 1 assets when the fair value is obtained from real time quotes for transactions in active
exchange markets involving identical assets. Our available-for- sale securities are classified as having Level 2 inputs. Our Level 2 assets are valued utilizing
a market approach where the market prices of similar assets are provided by a variety of independent industry standard data providers to our investment
custodian. Most of our cash equivalents and marketable securities are valued based on Level 2 inputs. As of January 30, 2011, we collected the balance of
our investment in the Reserve International Liquidity Fund, Ltd., or International Reserve Fund, that was classified as a Level 3 input due to the inherent
subjectivity and the significant judgment involved in its valuation. As such, we do not have any investment classified as Level 3 as of January 30, 2011.
All of our available-for-sale investments are subject to a periodic impairment review. We record a charge to earnings when a decline in fair value is
significantly below cost basis and judged to be other-than-temporary, or have other indicators of impairments. If the fair value of an available-for-sale debt
instrument is less than its amortized cost basis, an other-than - temporary impairment is triggered in circumstances where (1) we intend to sell the instrument,
(2) it is more likely than not that we will be required to sell the instrument before recovery of its amortized cost basis, or (3) a credit loss exists where we do
not expect to recover the entire amortized cost basis of the instrument. If we intend to sell or it is more likely than not that we will be required to sell the
available-for-sale debt instrument before recovery of its amortized cost basis, we recognize an other-than- temporary impairment in earnings equal to the
entire difference between the debt instruments’ amortized cost basis and its fair value. For available-for-sale debt instruments that are considered other-than-
temporarily impaired due to the existence of a credit loss, if we do not intend to sell and it is more likely than not that we will be required to sell the
instrument before recovery of its remaining amortized cost basis (amortized cost basis less any current-period credit loss), we separate the amount of the
impairment into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings.
Stock-based Compensation
Our stock-based compensation cost for equity awards is measured at grant date, based on the fair value of the awards, and is recognized as expense
over the requisite employee service period. We recognize stock-based compensation expense using the straight-line attribution method. We estimate the fair
value of employee stock options on the date of grant using a binomial model and we use the closing trading price of our common stock on the date of grant as
the fair value of awards of restricted stock units, or RSUs. The determination of fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors,
vesting schedules, death and disability probabilities, expected volatility and risk-free interest. Our management has determined that the use of implied
volatility is expected to be more reflective of market conditions and, therefore, can reasonably be expected to be a better indicator of our expected volatility
than historical volatility. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options.
The dividend yield assumption is based on the history and expectation of dividend payouts. We began segregating options into groups for employees with
relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model.
Using the binomial model, we estimated the fair value of the stock options granted under our stock option plans using the following assumptions
during the fiscal year ended January 30, 2011:
Weighted average expected life of stock options (in years) 3.1-6.7
Risk free interest rate 1.5% - 3.3%
Volatility 42% - 53%
Dividend yield -
Accounting standards also require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures were estimated based on our historical experience. If factors change and we employ different assumptions in the
application of accounting standards in future periods, the compensation expense that we record under these accounting standards may differ significantly from
what we have recorded in the current period.
Our stock-based compensation expense for employee stock purchase plan is recognized using an accelerated amortization method. We used the Black-
Scholes model to estimate the fair value of shares issued under our employee stock purchase plan during the fiscal year ended January 30, 2011, using the
following assumptions:
Weighted average expected life of stock options (in years) 0.5-2.0
Risk free interest rate 0.2-0.8%
Volatility 45%-47%
Dividend yield -
Litigation, Investigation and Settlement Costs
From time to time, we are involved in legal actions and/or investigations by regulatory bodies. We are aggressively defending our current litigation
matters for which we are responsible. However, there are many uncertainties associated with any litigation or investigations, and we cannot be certain that
these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our
business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine
that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we
will record the loss in accordance with U.S.GAAP. However, the actual liability in any such litigation or investigations may be materially different from our
estimates, which could require us to record additional costs.
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