Qualcomm 2005 Annual Report Download - page 60
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NOTE 1. THE COMPANY AND ITS SIGNIFICANT
ACCOUNTING POLICIES
The Company
QUALCOMM Incorporated (the Company or QUALCOMM), a
Delaware corporation, develops, designs, manufactures and markets
digital wireless telecommunications products and services based on
its Code Division Multiple Access (CDMA) technology. The Company
is a leading developer and supplier of CDMA-based integrated
circuits and system software for wireless voice and data com-
munications, multimedia functions and global positioning system
products to wireless device and infrastructure manufacturers. The
Company grants licenses to use portions of its intellectual property
portfolio, which includes certain patent rights essential to and/or
useful in the manufacture and sale of CDMA products, and receives
license fees as well as ongoing royalties based on sales by licensees
of wireless telecommunications equipment products incorporating
its CDMA technologies. The Company provides satellite and terres-
trial-based two-way data messaging and position reporting services
for transportation companies, private fl eets, construction equip-
ment fl eets and other enterprise companies. The Company provides
the BREW (Binary Runtime Environment for Wireless) product and
services to wireless network operators, handset manufacturers and
application developers and support for developing and delivering
over-the-air wireless applications and services. The Company also
makes strategic investments to promote the worldwide adoption
of CDMA products and services for wireless voice and Internet
data communications.
Principles of Consolidation
The Company’s consolidated fi nancial statements include the assets,
liabilities and operating results of majority-owned subsidiaries. The
ownership of the other interest holders of consolidated subsidiaries
is refl ected as minority interest and is not signifi cant. All signifi -
cant intercompany accounts and transactions have been eliminated.
Certain of the Company’s foreign subsidiaries are included in the
consolidated fi nancial statements one month in arrears to facilitate
the timely inclusion of such entities in the Company’s consolidated
fi nancial statements. The Company does not have any investments
in entities it believes are variable interest entities for which the
Company is the primary benefi ciary.
The Company deconsolidated the Vésper Operating Companies and
TowerCo during fi scal 2004 as a result of their sale (Note 12). Results
of operations and cash fl ows related to the Vésper Operating
Companies and TowerCo are presented as discontinued operations.
Financial Statement Preparation
The preparation of fi nancial statements in conformity with accounting
principles generally accepted in the United States requires manage-
ment to make estimates and assumptions that affect the reported
amounts and the disclosure of contingent amounts in the Company’s
fi nancial statements and the accompanying notes. Actual results
could differ from those estimates. Certain prior year amounts have
been reclassifi ed to conform to the current year presentation.
Fiscal Year
The Company operates and reports using a 52-53 week fi scal year
ending on the last Sunday in September. The fi scal years ended
September 25, 2005, September 26, 2004 and September 28, 2003
each include 52 weeks.
Revenue Recognition
The Company derives revenue principally from sales of integrated
circuit products, from royalties for its intellectual property, from
messaging and other services and related hardware sales, from
software development and licensing and related services, and from
license fees for intellectual property. The timing of revenue recog-
nition 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 the Company’s deliverables and
obligations. The development stage of the Company’s customers’
products does not affect the timing or amount of revenue recognized.
The Company licenses rights to use portions of its intellectual
property portfolio, 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, Wideband CDMA (WCDMA) and/or the CDMA Time
Division Duplex (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
the Company’s 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. The Company earns
royalties on such licensed CDMA products sold worldwide by its
licensees at the time that the licensees’ sales occur. The Company’s
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, the Company 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.
Starting in the fourth quarter of fi scal 2004, the Company determined
that, due to escalating and changing business trends, the Company
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 product inventories of licensees. Starting in the fourth
quarter of fi scal 2004, the Company began recognizing royalty reve-
nues for a quarter solely based on royalties reported by licensees
during such 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. Total royalties reported by external licensees for fi scal 2005
and recorded as revenue for the period were $1.64 billion. Total
royalties reported by external licensees for fi scal 2004 and 2003
were $1.29 billion and $837 million, respectively, as compared to
$1.14 billion and $838 million, respectively, recorded as royalty
revenues from the external licensees for the same periods.
Notes to Consolidated Financial Statements