Qualcomm 2014 Annual Report Download - page 64

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QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If a debt security’s market value is below amortized cost and the Company either intends to sell the security or it is more likely than not that
the Company will be required to sell the security before its anticipated recovery, the Company records an other-than-temporary impairment
charge to net investment income for the entire amount of the impairment. For the remaining debt securities, if an other-than-temporary
impairment exists, the Company separates the other-than-temporary impairment into 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, net
of income taxes.
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 net investment income. 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, certain preferred stock, equity 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 equity 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.
Derivatives. The Company’s primary objective for holding derivative instruments is to manage foreign exchange risk for certain foreign
currency revenue and operating expenditure transactions. To a lesser extent, the Company also holds derivative instruments in its investment
portfolios to manage risk by acquiring or reducing foreign exchange risk, interest rate risk and/or equity, prepayment and credit risk. The
Company also uses derivative instruments as part of its stock repurchase program. Derivative instruments are recorded at fair value and included
in other current assets, noncurrent assets, other accrued liabilities or other noncurrent liabilities based on their maturity dates. Counterparties to
the Company’s derivative instruments are all major institutions.
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. These derivative
instruments mature between three and six months. Gains and losses arising from the effective portion of such 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 costs and expenses, as applicable, in the consolidated statements of operations in the same period in which the underlying
transactions affect the Company’
s earnings. Gains and losses arising from the ineffective portion of such 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 such derivative instruments 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 and in total liabilities was negligible at September 28, 2014 . At September 29, 2013 , the fair value recorded in total assets and in
total liabilities was $38 million and $9 million , respectively. All such instruments were designated as cash flow hedges.
Investment Portfolio Derivatives: The Company also utilizes currency forwards, futures, options and swaps that are not designated as
hedging instruments to acquire or reduce foreign exchange, interest rate and/or equity, prepayment and credit risks in its marketable securities
investment portfolios. The Company primarily uses such derivative instruments for risk management, and not speculative, purposes. These
derivative instruments mature over various periods up to 3 years . Gains and losses arising from changes in the fair values of such derivative
instruments are recorded in net investment income as gains and losses on derivative instruments. The cash flows associated with such derivative
instruments are classified as cash flows from
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