Qualcomm 2004 Annual Report Download - page 44

QUALCOMM 40
Management’s Discussion and Analysis continued
any significant news that has been released specific to the investee or the investee’s competitors and/or industry and the outlook of the overall
industry in which the investee operates. 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.
Income Taxes. Our income tax provision is based on calculations and assumptions that will be subject to examination by the Internal Revenue
Service and other tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the
current or prior years in determining the adequacy of our provision for income taxes. Should the actual results differ from our estimates, we
would have to adjust the income tax provision in the period in which the facts that give rise to the revision become known. Such adjustment
could have a material impact on our results of operations.
The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income,
projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning
strategies. As of September 30, 2004, gross deferred tax assets were $1.1 billion. If the Company is unable to generate sufficient future taxable
income in certain tax jurisdictions, or if there is a material change in the actual effective tax rates or time period within which the underlying
temporary differences become taxable or deductible, the Company could be required to increase its valuation allowance against its deferred
tax assets which could result in an increase in its effective tax rate and an adverse impact on operating results.
As of September 30, 2004, the Company has recorded gross deferred tax assets of $418 million related to capital loss carry forwards. We can only
use capital losses to offset capital gains. Based upon our assessments of projected future capital gains and losses and related tax planning strate-
gies, we expect that our future capital gains will not be sufficient to utilize all the capital losses that we have incurred through fiscal 2004. Therefore,
we have provided a valuation allowance in the amount of $139 million for the portion of capital losses we do not expect to utilize. Adjustments
to our valuation allowance based on changes to our forecast of capital losses and capital gains are reflected in the period the change is made.
We consider the operating earnings of non-United States subsidiaries to be indefinitely invested outside the United States. No provision has
been made for United States federal and state, or foreign taxes that may result from future remittances of undistributed earnings of foreign
subsidiaries, the cumulative amount of which is approximately $1.5 billion as of September 30, 2004. Should we repatriate foreign earnings, we
would have to adjust the income tax provision in the period in which the decision to repatriate earnings of foreign subsidiaries is made. Weare
currently studying the impact of the one-time favorable foreign dividend provisions recently enacted as part of the American Jobs Creation Act
of 2004, and may decide to repatriate future earnings of some of our foreign subsidiaries.
Litigation. We are currently involved in certain legal proceedings. Although there can be no assurance that unfavorable outcomes in any of
these matters would not have a material adverse effect on the Company’soperating results, liquidity or financial position, the Company believes
the claims arewithout merit and intends to vigorously defend the actions. We estimate the range of liability related to pending litigation where
the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability
is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the
claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates.
The Company has not recorded any accrual for contingent liability associated with the Company’s legal proceedings based on the Company’s
belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time. Revisions in our esti-
mates of the potential liability could materially impact our results of operations.
Licensing
We grant licenses to use portions of our intellectual property portfolio, which includes certain patent rights essential to and/or useful in the
manufacture, use and sale of CDMA (including, without limitation, cdmaOne, CDMA2000 1X/1xEV-DO/1xEV-DV, TD-SCDMA and WCDMA)
products. Licensees typically pay a nonrefundable license fee in one or moreinstallments and ongoing royalties based on their sales of products
incorporating or using our licensed intellectual property.License fees are recognized over the estimated period of future benefit to the average
licensee, typically five to seven years. We earn royalties on such licensed CDMA products sold worldwide by our licensees at the time that the
licensees’ sales occur. Our licensees, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of
that quarter, and, in some instances, although royalties are reported quarterly, payment is on a semi-annual basis. During periods preceding
the fourth quarter of fiscal 2004, we estimated and recorded the royalty revenues earned for sales by certain licensees (the Estimated Licensees)
in the quarter in which such sales occurred, but only when reasonable estimates of such amounts could be made. Not all royalties earned were
estimated. Royalties for licensees for which we had minimal reporting history and certain licensees that did not incorporate our integrated circuit
products into their own products were recorded one quarter in arrears, i.e. in the quarter in which the royalties were reported to us by those
licensees. Estimates of royalty revenues for the Estimated Licensees were based on analyses of our sales of integrated circuits to Estimated
Licensees, historical royalty data for Estimated Licensees, an estimate of the time between our sales of integrated circuits to Estimated Licensees
and Estimated Licensees’ sales of CDMA products, average sales price forecasts, estimates of inventory levels and current market and economic
trends. Once royalty reports were received from the Estimated Licensees, the variance between such reports and the estimate was recorded
as royalty revenue in the quarter in which the reports were received, i.e. in most cases, the quarter subsequent to the quarter in which the
estimated royalties were recorded as revenue.
Starting in the fourth quarter of fiscal 2004, we determined that, due to recent escalating business trends, we no longer have the ability to reliably
estimate royalty revenues from certain licensees. These escalating trends include the commercial launches and global expansion of WCDMA
networks, changes in market share among licensees due to increased global competition and increased variability in the integrated circuit and
finished product inventories of licensees. Accordingly, we did not estimate royalty revenues earned in the fourth quarter of fiscal 2004. Starting in
the fourth quarter of fiscal 2004, we began recognizing revenues solely based on royalties reported by licensees during the quarter. The change