Intel 2014 Annual Report Download - page 35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical Accounting Estimates
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results
that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective
judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical
accounting estimates include:
•the valuation of non-marketable equity investments and the determination of other-than-temporary impairments, which impact
gains (losses) on equity investments, net when we record impairments;
•the assessment of recoverability of long-lived assets (property, plant and equipment; goodwill; and identified intangibles), which
impacts gross margin or operating expenses when we record asset impairments or accelerate their depreciation or amortization;
•the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax
positions), which impact our provision for taxes;
•the valuation of inventory, which impacts gross margin; and
•the recognition and measurement of loss contingencies, which impact gross margin or operating expenses when we
recognize a loss contingency, revise the estimate for a loss contingency, or record an asset impairment.
In the following section, we discuss these policies further, as well as the estimates and judgments involved.
Non-Marketable Equity Investments
We regularly invest in non-marketable equity instruments of private companies, which range from early-stage companies that are
often still defining their strategic direction to more mature companies with established revenue streams and business models. The
carrying value of our non-marketable equity investment portfolio, excluding equity derivatives, totaled $3.2 billion as of
December 27, 2014 ($2.3 billion as of December 28, 2013).
Our non-marketable equity investments are recorded using the cost method or the equity method of accounting, depending on the
facts and circumstances of each investment. Our non-marketable equity investments are classified within other long-term assets
on the consolidated balance sheets.
Non-marketable equity investments are inherently risky, and their success depends on product development, market acceptance,
operational efficiency, and other key business factors. The companies could fail or not be able to raise additional funds when
needed, or they may receive lower valuations with less favorable investment terms than previous financings. These events could
cause our investments to become impaired. In addition, financial market volatility could negatively affect our ability to realize value
in our investments through liquidity events such as initial public offerings, mergers, and private sales. For further information
about our investment portfolio risks, see “Risk Factors” in Part I, Item 1A of this Form 10-K.
We determine the fair value of our non-marketable equity investments portfolio quarterly for impairment and disclosure purposes;
however, the investments are recorded at fair value only if an impairment is recognized. The measurement of fair value requires
significant judgment and includes a qualitative and quantitative analysis of events or circumstances that impact the fair value of
the investment. Qualitative analysis of our investments involves understanding our investee’s revenue and earnings trends
relative to pre-defined milestones and overall business prospects, the technological feasibility of our investee’s products and
technologies, the general market conditions in the investee’s industry or geographic area including adverse regulatory or
economic changes, and the management and governance structure of the investee. Quantitative assessments of the fair value of
our investments are developed using the market and income approaches. The market approach includes the use of financial
metrics and ratios of comparable public companies, such as revenue, earnings, comparable performance multiples, recent
financing rounds, the terms of the investees’ issued interests, and the level of marketability of the investments. The selection of
comparable companies requires management judgment and is based on a number of factors, including comparable companies’
sizes, growth rates, industries, and development stages. The income approach includes the use of a discounted cash flow model,
which requires significant estimates regarding the investees’ revenue, costs, and discount rates based on the risk profile of
comparable companies. Estimates of revenue and costs are developed using available market, historical, and forecast data.
If the fair value of an investment is below our carrying value, we determine whether the investment is other-than-temporarily
impaired based on our quantitative and qualitative analysis, which includes assessing the severity and duration of the impairment
and the likelihood of recovery before disposal. If the investment is considered to be other-than-temporarily impaired, we record
the investment at fair value by recognizing an impairment. Impairments of non-marketable equity investments were $140 million in
2014 ($112 million in 2013 and $104 million in 2012).
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