Qualcomm 2004 Annual Report Download - page 43

QUALCOMM 39
and WCDMA in Japan as well as their success in exporting products worldwide. The decrease in revenues from customers in the United States,
as a percentage of the total, is primarily attributed to overall increases in revenues in geographic regions other than the United States.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue
recognition, valuation of intangible assets and investments, income taxes, and litigation. We base our estimates on historical and anticipated
results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to
future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our
estimates could have a significant adverse effect on our operating results and financial position. We believe that the following significant
accounting policies and assumptions may involve a higher degree of judgment and complexity than others.
Revenue Recognition. We derive revenue principally from sales of integrated circuit products, from royalties for our intellectual property, from
messaging and other services and related hardware sales, from software development and related services, and from license fees for intellectual
property. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, includ-
ing the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue
recognized involves judgments and estimates that we believe are reasonable, but it is possible that actual results may differ from our estimates.
We license rights to use portions of our intellectual property portfolio, which includes certain patent rights essential to and/or useful in the
manufacture and sale of CDMA (including, without limitation, cdmaOne, CDMA2000 1X/1x EV-DO/1xEV-DV, TD-SCDMA and WCDMA) products.
Werecognized royalty revenue as earned when reasonable estimates of such amounts could be made for certain licensees through the third
quarter of fiscal 2004. Starting in the fourth quarter of fiscal 2004, we recognize revenues solely when royalties are reported to us by our
licensees, as we no longer have the ability to reliably estimate these amounts. The change in the timing of recognizing royalty revenue was made
prospectively and had the initial one-time effect of reducing royalty revenues recorded in the fourth quarter of fiscal 2004 due to the fact that
no estimated royalty revenues were recorded in that quarter.As a result of this change, we believe that the estimates and assumptions used
in applying our revenue recognition policies with respect to the timing and amount of recording our royalty revenues will have a less material
impact on our consolidated financial statements.
Valuation of Intangible Assets and Investments. Our business acquisitions typically result in goodwill and other intangible assets, and the
recorded values of those assets may become impaired in the future. As of September 30, 2004, our goodwill and intangible assets, net of
accumulated amortization, were$356 million and $128 million, respectively.The determination of the value of such intangible assets requires
management to make estimates and assumptions that affect our consolidated financial statements. We assess potential impairments to intangible
assets when thereis evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered.
Our judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational
performance of our acquired businesses, market conditions and other factors. Although there are inherent uncertainties in this assessment
process, the estimates and assumptions we use are consistent with our internal planning. If these estimates or their related assumptions change
in the future, we may be required to record an impairment charge on all or a portion of our goodwill and intangible assets. Furthermore, we
cannot predict the occurrence of futureimpairment-triggering events nor the impact such events might have on our reported asset values.
Future events could cause us to conclude that impairment indicators exist and that goodwill or other intangible assets associated with our
acquired businesses is impaired. Any resulting impairment loss could have an adverse impact on our results of operations.
We hold minority strategic investments in publicly-traded companies whose share prices may be highly volatile. These investments totaled
$150 million at September 30, 2004. Werecord impairment charges when we believe an investment has experienced a decline that is other
than temporary. The determination that a decline is other than temporary is subjective and influenced by many factors. Future adverse changes
in market conditions or poor operating results of investees could result in losses or an inability to recover the carrying value of the investments,
thereby possibly requiring impairment charges in the future. When assessing a publicly-traded investment for an other-than-temporary decline
in value, we consider such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long
the market value of the investment has been less than its original cost, the performance of the investee’s stock price in relation to the stock price
of its competitors within the industryand the market in general and analyst recommendations. Wealso review the financial statements of the
investee to determine if the investee is experiencing financial difficulties. In the event our judgments change as to other-than-temporary declines
in value, we may record an impairment loss which could have an adverse impact on our results of operations.
We hold minority strategic investments in private companies whose values are difficult to determine. These investments totaled $163 million at
September 30, 2004. We record impairment charges when we believe an investment has experienced a decline that is other than temporary.
The determination that a decline is other than temporary is subjective and influenced by many factors. Future adverse changes in market
conditions or poor operating results of investees could result in losses or an inability to recover the carrying value of the investments, thereby
possibly requiring impairment charges in the future. When assessing investments in private companies for an other-than-temporary decline in
value, we consider 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, the liquidity and cash position,
including its cash burnrate and market acceptance of the investee’sproducts and services. From time to time, we may consider third party
evaluations, valuation reports or advice from investment banks. Wealso consider new products/services that the investee may have forthcoming,