Qualcomm 2012 Annual Report Download - page 63

QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the portion of the loss related to credit factors, or the credit loss portion, and the portion of the loss that is not related to credit factors, or the
noncredit loss portion. The credit loss portion is the difference between the amortized cost of the security and the Company’
s best estimate of the
present value of the cash flows expected to be collected from the debt security. The noncredit loss portion is the residual amount of the other-
than-temporary impairment. The credit loss portion is recorded as a charge to net investment income, and the noncredit loss portion is recorded
as a component of other accumulated comprehensive income.
When calculating the present value of expected cash flows to determine the credit loss portion of the other-than-temporary impairment, the
Company estimates the amount and timing of projected cash flows, the probability of default and the timing and amount of recoveries on a
security-by-security basis. These calculations use inputs primarily based on observable market data, such as credit default swap spreads,
historical default and recovery statistics, rating agency data, credit ratings and other data relevant to analyzing the collectibility of the security.
The amortized cost basis of a debt security is adjusted for any credit loss portion of the impairment recorded to earnings. The difference between
the new cost basis and cash flows expected to be collected is accreted to net investment income over the remaining expected life of the security.
Securities that are accounted for as equity securities include investments in common stock, equity mutual and exchange-
traded funds and debt
funds. For equity securities, the Company considers the loss relative to the expected volatility and the likelihood of recovery over a reasonable
period of time. If events and circumstances indicate that a decline in the value of an equity security has occurred and is other than temporary, the
Company records a charge to net investment income for the difference between fair value and cost at the balance sheet date. Additionally, if the
Company has either the intent to sell the security or does not have both the intent and the ability to hold the equity security until its anticipated
recovery, the Company records a charge to net investment income for the difference between fair value and cost at the balance sheet date.
Securities Lending. The Company may engage in transactions in which certain fixed-income and equity securities are loaned to selected
broker-dealers. At September 30, 2012 and September 25, 2011 , loaned securities of $98 million and $44 million , respectively, were included
in marketable securities on the balance sheet. Cash collateral is held and invested by one or more securities lending agents on behalf of the
Company. The Company monitors the fair value of securities loaned and the collateral received and obtains additional collateral as necessary .
Collateral of $100 million and $46 million at September 30, 2012 and September 25, 2011 , respectively, was recorded in cash equivalents with
a corresponding amount in other current liabilities.
Derivatives. The Company’s primary objectives for holding derivative instruments are to manage foreign exchange risk for certain foreign
currency revenue and operating expenditure transactions and as part of its stock repurchase program. To a lesser extent, the Company also holds
derivative instruments in its investment portfolios to manage overall portfolio risk by acquiring or reducing foreign exchange, interest rate and/or
equity, prepayment and credit risk.
Foreign Currency Hedges: The Company manages its exposure to foreign exchange market risks, when deemed appropriate, through the use
of derivative instruments, including foreign currency forward and option contracts with financial counterparties. We utilize such derivative
financial instruments for hedging or risk management purposes rather than for speculation purposes. Counterparties to the Company’s derivative
instruments are all major institutions. The derivative instruments mature between one month and 26 months . Derivative instruments are
recorded at fair value and are included in other current assets, noncurrent assets, other accrued liabilities or other noncurrent liabilities based on
their maturity date. Gains and losses arising from the effective portion of foreign currency forward and option contracts that are designated as
cash flow hedging instruments are recorded as a component of accumulated other comprehensive income as gains and losses on derivative
instruments, net of income taxes. The hedging gains and losses in accumulated other comprehensive income are subsequently reclassified to
revenues or operating expenses, as applicable, in the consolidated statement of income in the same period in which the underlying transactions
affect the Company’s earnings. Gains and losses arising from the ineffective portion of foreign currency forward and option contracts are
recorded in net investment income as gains and losses on derivative instruments. The cash flows associated with derivative instruments
designated as cash flow or net investment hedging instruments are classified as cash flows from operating activities in the consolidated
statements of cash flows, which is the same category as the hedged transaction. The cash flows associated with the ineffective portion of
derivatives are classified as cash flows from investing activities in the consolidated statements of cash flows.
The aggregate fair value of the Company’s foreign currency option and forward contracts used to hedge foreign currency risk recorded in
total assets was $11 million and $17 million at September 30, 2012 and September 25, 2011 , respectively, and the fair value recorded in total
liabilities was $6 million and $42 million at September 30, 2012 and September 25, 2011 , respectively, all of which were designated as cash
flow hedging instruments.
At September 25, 2011 , the fair value of the Company’s foreign currency forward contract used to hedge the Company’s investment in a
wholly-owned subsidiary in Australia recorded in total assets was $7 million . The forward contract was designated as a net investment hedging
instrument. There were no such outstanding derivative instruments at September 30, 2012 . Gains and losses arising from changes in fair value
of the net investment hedge were recorded to selling, general and administrative expenses.
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