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TEXAS INSTRUMENTS 2013 ANNUAL REPORT • 49
ANNUAL
REPORT
In addition to the factors described above, the effective tax rate reflected in forward-looking statements is based on then-current
tax law. Significant changes in tax law enacted during the year could affect these estimates. Retroactive changes in tax law enacted
subsequent to the end of a reporting period are reflected in the period of enactment as a discrete tax item. The extent to which the
effective tax rate reflected in forward-looking statements differs from the 35 percent statutory corporate tax rate is generally due to
lower statutory tax rates applicable to our operations in many of the jurisdictions in which we operate and from U.S. tax benefits. These
lower tax rates are generally statutory in nature, without expiration and available to companies that operate in those taxing jurisdictions.
Inventory valuation allowances
Inventory is valued net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. Allowances are
determined quarterly by comparing inventory levels of individual materials and parts to historical usage rates, current backlog and
estimated future sales and by analyzing the age of inventory, in order to identify specific components of inventory that are judged
unlikely to be sold. Allowances are also calculated quarterly for instances where inventoried costs for individual products are in excess
of market prices for those products. In addition to this specific identification process, statistical allowances are calculated for remaining
inventory based on historical write-offs of inventory for salability and obsolescence reasons. Actual future write-offs of inventory for
salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes
in customer demand, customer negotiations, technology shifts and other factors.
Impairment of acquisition-related intangibles and goodwill
We review acquisition-related intangible assets for impairment when certain indicators suggest the carrying amount may not be
recoverable. Factors considered include the underperformance of an asset compared with expectations and shortened useful lives due
to planned changes in the use of the assets. Recoverability is determined by comparing the carrying amount of the assets to estimated
future undiscounted cash flows. If future undiscounted cash flows are less than the carrying amount, an impairment charge would be
recognized for the excess of the carrying amount over fair value, determined by utilizing a discounted cash flow technique. Additionally,
in the case of intangible assets that will continue to be used in future periods, a shortened useful life may be utilized if appropriate,
resulting in accelerated amortization based upon the expected net realizable value of the asset at the date the asset will no longer
be utilized.
We review goodwill for impairment annually, or more frequently if certain impairment indicators arise, such as significant changes in
business climate, operating performance or competition, or upon the disposition of a significant portion of a reporting unit. A significant
amount of judgment is involved in determining if an indicator of impairment has occurred between annual test dates. This impairment
review compares the fair value for each reporting unit containing goodwill to its carrying value. Determining the fair value of a reporting
unit involves the use of significant estimates and assumptions, including projected future cash flows, discount rates based on weighted
average cost of capital and future economic and market conditions. We base our fair-value estimates on assumptions we believe to
be reasonable.
Actual cash flow amounts for future periods may differ from estimates used in impairment testing.
Changes in accounting standards
See Note 1 to the financial statements for information on new accounting standards.
Off-balance sheet arrangements
As of December 31, 2013, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Commitments and contingencies
See Note 13 to the financial statements for a discussion of our commitments and contingencies.
Quantitative and qualitative disclosures about market risk
Foreign exchange risk
The U.S. dollar is the functional currency for financial reporting. Our non-U.S. entities frequently own assets or liabilities denominated in
U.S. dollars or non-local currencies. Exchange rate fluctuations can have a significant impact on taxable income in those jurisdictions,
and consequently our effective tax rate.