Qualcomm 2002 Annual Report Download - page 65

improvements are depreciated over thirty years and fifteen years, respectively.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the remaining term of the related lease. Direct external and internal costs of
developing software for internal use are capitalized subsequent to the preliminary
stage of development. Other property, plant and equipment have useful lives ranging
from two to eighteen years. Maintenance, repairs, and minor renewals and better-
ments are charged to expense as incurred.
Upon the retirement or disposition of property, plant and equipment, the related
cost and accumulated depreciation or amortization are removed and the gain or loss
is recorded.
OTHER INVESTMENTS
Investments in Other Entities
The Company makes strategic investments in companies that have developed or
are developing innovative wireless data applications and wireless carriers that pro-
mote the worldwide deployment of CDMA systems. Investments in corporate entities
with less than a 20% voting interest are generally accounted for under the cost
method. The Company uses the equity method to account for investments in corpo-
rate entities in which it has a voting interest of 20% to 50% and other than minor to
50% ownership interests in partnerships and limited liability corporations, or in which
it otherwise has the ability to exercise significant influence. Under the equity method,
the investment is originally recorded at cost and adjusted to recognize the Company’s
share of net earnings or losses of the investee, limited to the extent of the Company’s
investment in and advances to the investee and financial guarantees on behalf of the
investee that create additional basis.
The Company regularly monitors and evaluates the realizable value of its invest-
ments. When assessing an investment for an other-than-temporary decline in
value, the Company considers such factors as, among other things, the share price
from the investee’s latest financing round, the performance of the investee in relation
to its own operating targets and its business plan, the investee’s revenue and cost
trends, as well as liquidity and cash position, including its cash burn rate, market
acceptance of the investee’s products/services as well as any new products or serv-
ices that may be forthcoming, any significant news that has been released specific
to the investee or the investee’s competitors and/or industry, and the outlook for the
overall industry in which the investee operates. From time to time, the Company
may consider third party evaluations, valuation reports or advice from investment
banks. If events and circumstances indicate that a decline in the value of these
assets has occurred and is other than temporary, the Company records a charge to
investment (expense) income.
Derivatives
The Company adopted Statement of Financial Accounting Standards No. 133
(FAS 133), “Accounting for Derivative Instruments and Hedging Activities,” as of the
beginning of fiscal 2001. FAS 133 requires that certain derivative instruments be
recorded at fair value. Derivative instruments held by the Company are comprised of
warrants and other rights to purchase equity interests in certain other companies
related to strategic investment and financing activities. The Company recorded a $129
million gain, net of taxes of $87 million, as the cumulative effect of the change in
accounting principle as of the beginning of fiscal 2001. The cumulative effect of the
accounting change related primarily to the recognition of the unrealized gain on a
warrant to purchase 4,500,000 shares of Leap Wireless International, Inc. (Leap
Wireless) common stock issued to the Company in connection with its spin-off of
Leap Wireless in September 1998 (Leap Wireless Spin-off). At September 30, 2002
and 2001, the Company had the right to purchase 3,375,000 shares of Leap Wireless
common stock under the warrant. The warrant’s value was insignificant at
September 30, 2002, as compared to the estimated fair value of $49 million at
September 30, 2001, calculated using the Black-Scholes option-pricing model.
At September 30, 2002 and 2001, the Company’s derivative balances were
included in other investments and none of the Company’s derivatives were designated
as hedges.
•Warrants. The Company holds warrants to purchase equity interests in certain
other companies related to its strategic investment activities. The Company’s
warrants are not held for trading purposes. The Company’s warrants to purchase
equity interests in certain publicly-traded and private companies are recorded at
fair value. Changes in fair value are recorded in investment (expense) income, as
a change in unrealized gain on derivative instruments because the warrants do
not meet the requirements for hedge accounting.
• Warrants that do not have contractual net settlement provisions are recorded at
cost. At September 30, 2002 and 2001, the Company’s warrant balances were
included in other investments.
•Forward Contracts. The Company enters into foreign currency forward contracts
to hedge certain foreign currency transactions and probable anticipated foreign
currency transactions. Unrealized gains and losses arising from foreign currency
forward contracts are reported in investment (expense) income as a change in fair
values of derivative instruments because the forward contracts are not designated
as hedging instruments. Upon settlement of the foreign currency forward
contracts, the unrealized gains and losses are reclassified to net realized gains
(losses) on derivative instruments. The Company had no foreign currency forward
contracts outstanding as of September 30, 2002; one such contract was out-
standing as of September 30, 2001. The amount of the unrealized loss as of
September 30, 2001 was not material.
QUALCOMM 2002 ANNUAL REPORT PAGE 63