Qualcomm 2004 Annual Report Download - page 54

QUALCOMM 50
Management’s Discussion and Analysis continued
Future Accounting Requirements
In June 2004, the FASB issued EITF Issue No. 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments
Other Than Common Stock.” EITF Issue No. 02-14 addresses whether the equity method of accounting applies when an investor does not
have an investment in voting common stock of an investee but exercises significant influence through other means. EITF Issue No. 02-14 states
that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common
stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the
investee. The accounting provisions of EITF Issue No. 02-14 are effective for the first quarter of fiscal 2005. We are in the process of determining
the effect, if any, the adoption of EITF Issue No. 02-14 will have on our financial statements.
In March 2004, the FASB issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments” which provides new guidance for assessing impairment losses on debt and equity investments. Additionally, EITF Issue No. 03-1
includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the
accounting provisions of EITF Issue No. 03-1; however, the disclosure requirements remain effective and have been adopted for our year
ended September 30, 2004. We will evaluate the effect, if any, of EITF 03-1 when final guidance is released.
Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Market Risk. We have fixed income securities consisting of cash equivalents and investments in marketable debt securities. We
also have diversified portfolios of non-investment grade securities managed by institutional portfolio managers, which are subject to a higher
degree of default risk than our investment grade fixed income portfolios. Changes in the general level of United States interest rates can affect
the principal values and yields of fixed income investments. Our fixed income investments have grown significantly in size and are subject to
interest rate risk and credit risk. If interest rates in the general economy were to rise rapidly in a short period of time, our fixed income investments
could lose value. If the general economy were to weaken significantly, the credit profile of issuers of securities held in our investment portfolios
could deteriorate and our fixed income investments could lose value. We may implement investment strategies of different types with varying
duration and risk/return trade-offs that do not perform well. See “Note 2 to the Consolidated Financial Statements — Marketable Securities”
for information about investments in marketable debt securities.
We have finance receivables and notes receivable (both included in other assets) that bear interest at fixed rates. See “Note 3 to the Consolidated
Financial Statements — Composition of Certain Financial Statement Captions” for information about finance receivables. Finance receivables
and notes that bear interest at fixed rates could lose value if interest rates increase.
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For our fixed income
investment portfolio, the table presents principal cash flows and related weighted-average yield at cost. For our finance receivables and notes
receivable, the table presents contractual interest rates by expected maturity dates. Additionally, we have assumed that our fixed income securi-
ties aresimilar enough within the specified categories to aggregate those securities for presentation purposes.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
No Single Fair
(Dollars in millions) 2005 2006 2007 2008 2009 Thereafter Maturity Total Value
Fixed income securities:
Cash and cash equivalents $458 $ — $ — $ — $ — $ — $ — $ 458 $ 457
Interest rate 1.5%
Held-to-maturity securities $ 10 $130 $ — $ — $ — $ — $ — $ 140 $ 142
Interest rate 1.5% 1.7%
Available-for-sale securities:
Investment grade $825 $ 803 $ 805 $ 59 $ 63 $ 39 $2,054 $ 4,648 $ 4,648
Interest rate 1.9% 2.2% 2.3% 2.7% 2.1% 2.9% 2.0%
Non-investment grade $ 1 $ 3 $ 6 $ 20 $ 61 $ 481 $ — $ 572 $ 572
Interest rate 1.1% 7.0% 8.9% 9.7% 8.7% 8.5%
Finance receivables in other assets $ 3 $ — $ — $ — $ — $ — $ — $ 3 $ 2
Interest rate 8.0%
Notes receivable in other assets $ — $ 2 $ — $ — $ — $ 87 $ — $ 89 $ 60
Interest rate 0.0% 0.0%