SanDisk 2014 Annual Report Download - page 119

business. Our business consists of both established and emerging technologies and our forecasts for
emerging technologies are based upon internal estimates and external sources rather than historical
information. If future forecasts are revised, they may indicate or require future impairment charges. We
base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and
inherently uncertain. Actual future results may differ from those estimates.
We perform our annual impairment analysis of goodwill and indefinite-lived intangible assets (such as
IPR&D) on the first day of the fourth quarter of each fiscal year, or more often if there are indicators of
impairment. We allocate goodwill to reporting units based on the reporting unit expected to benefit from
the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign
goodwill using a relative fair value allocation approach. As of December 28, 2014, 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 3, ‘‘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 non-binding 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
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Annual Report