Qualcomm 2005 Annual Report Download - page 42
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38 qualcomm 2005
Japan increased as a percentage of total revenues, from 15% in fi scal
2003 to 18% in fi scal 2004 and 21% in fi scal 2005, due primarily to
increased royalties reported by licensees in Japan resulting from the
growth of CDMA2000 and WCDMA in Japan as well as their success
in exporting products worldwide. Combined revenues from custom-
ers in South Korea and the United States decreased as a percentage
of total revenues, from 68% in fi scal 2003 to 64% in fi scal 2004 and
55% in fi scal 2005, due primarily to increases in revenues from man-
ufacturers of CDMA and WDCMA products in other regions such as
China, Japan and Western Europe.
Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations and liquidity
and capital resources are based on our consolidated fi nancial state-
ments which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of these fi nancial 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 judg-
ments, 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 car-
rying 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 signifi cant adverse effect on our operating
results and fi nancial position. We believe that the following signifi -
cant 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 and license fees for our
intellectual property, from messaging and other services and related
hardware sales and from software development and licensing and
related services. The timing of revenue recognition and the amount
of revenue actually recognized in each case depends upon a variety
of factors, including the specifi c 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 port folio,
which includes certain patent rights essential to and/or useful in the
manufacture and sale of CDMA products, including, without limitation,
products implementing cdmaOne, CDMA2000, WCDMA and/or the
CDMA TDD standards and their derivatives. Licensees typically pay a
license fee in one or more installments 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 benefi t to the average licensee, typically fi ve 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 the periods preceding the fourth quarter of fi scal 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 recorded
based on estimates.
In the fourth quarter of fiscal 2004, we determined that, due to
escalating and changing business trends, we no longer had the ability
to reliably estimate royalty revenues from the Estimated Licensees.
These escalating and changing trends included 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 fi nished prod-
uct inventories of licensees. Starting in the fourth quarter of fi scal
2004, we began recognizing royalty revenues solely based on roy-
alties reported by licensees during the quarter. 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 fi scal 2004.
Valuation of Intangible Assets and Investments. Our business
acquisitions typically result in the recording of goodwill and other
intangible assets, and the recorded values of those assets may
become impaired in the future. As of September 25, 2005, our good-
will and intangible assets, net of accumulated amortization, were
$571 million and $237 million, respectively. The determination of
the value of such intangible assets requires management to make
estimates and assumptions that affect our consolidated fi nancial
statements. We assess potential impairments to intangible assets
when there is 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 fl ows related to intangible assets are based on opera-
tional 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 future impairment-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 investments in publicly-traded companies whose
share prices may be highly volatile. These investments, which are
recorded at fair value with increases or decreases generally recorded
through stockholders’ equity as other comprehensive income or loss,
totaled $1.16 billion at September 25, 2005. We record impairment
charges when we believe an investment has experienced a decline
that is other-than-temporary. The determination that a decline is