SanDisk 2013 Annual Report Download - page 147

2013, we had one reporting unit. We may first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is ‘‘more likely than not’’ that the fair value of
the reporting unit is less than its carrying amount and whether the two-step impairment test on goodwill is
required. If, based upon qualitative factors, it is ‘‘more likely than not’’ that the fair value of a reporting
unit is greater than its carrying amount, we will not be required to proceed to a two-step impairment test
on goodwill. However, we also have the option to proceed directly to a two-step impairment test on
goodwill. In the first step, or Step 1, of the two-step impairment test, we compare the fair value of each
reporting unit to its carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is
considered not impaired and we are not required to perform further testing. If the carrying value of the net
assets exceeds the fair value, then we must perform the second step, or Step 2, of the two-step impairment
test in order to determine the implied fair value of goodwill. If the carrying value of goodwill exceeds its
implied fair value, then we would record an impairment loss equal to the difference. The fair value of each
reporting unit is estimated using a discounted cash flow methodology. This analysis requires significant
judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation
of the long-term rate of growth for our business, estimation of the useful life over which cash flows will
occur, and determination of our weighted average cost of capital. We evaluate the reasonableness of the
fair value calculations of our reporting units by reconciling the total of the fair values of all of our reporting
units to our total market capitalization, taking into account an appropriate control premium. The
determination of a control premium requires the use of judgment and is based primarily on comparable
industry and deal-size transactions, related synergies and other benefits. When we are required to perform
a Step 2 analysis, determining the fair value of our net assets and our off-balance sheet intangibles used in
Step 2 requires us to make judgments and involves the use of significant estimates and assumptions. For
both goodwill and indefinite-lived intangible assets, we have the option to first assess qualitative factors to
determine whether events and circumstances indicate that it is more likely than not that the goodwill or an
indefinite-lived intangible asset is impaired and determine whether further action is needed.
Fair Value of Investments in Debt Instruments. There are three levels of inputs that may be used to
measure fair value (see Note 2, ‘‘Investments and Fair Value Measurements’’ in the Notes to Consolidated
Financial Statements included in Item 8 of this report). Each level of input has different levels of
subjectivity and difficulty involved in determining fair value. Level 1 securities represent quoted prices in
active markets, and therefore do not require significant management judgment. Our Level 2 securities are
primarily valued using quoted market prices for similar instruments and nonbinding market prices that are
corroborated by observable market data. We use inputs such as actual trade data, benchmark yields,
broker/dealer quotes, and other similar data, which are obtained from independent pricing vendors,
quoted market prices, or other sources to determine the ultimate fair value of our assets and liabilities. The
inputs and fair value are reviewed for reasonableness, may be further validated by comparison to publicly
available information, compared to multiple independent valuation sources and could be adjusted based
on market indices or other information. In the current market environment, the assessment of fair value
can be difficult and subjective. However, given the relative reliability of the inputs we use to value our
investment portfolio and because substantially all of our valuation inputs are obtained using quoted market
prices for similar or identical assets, we do not believe estimates and assumptions materially impacted our
valuation of our cash equivalents and short and long-term marketable securities. We currently do not have
any investments that use Level 3 inputs.
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