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Basis of Presentation and Significant Accounting Policies and Practices | 9 Months Ended
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Sep. 30, 2018
Accounting Policies [Abstract] |
Basis of presentation and significant accounting policies and practices | 2. Basis of presentation and significant accounting policies and practices Basis of presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and on the same basis as the audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2017, except for the effects of adopting Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Consolidated Statements of Income, Comprehensive Income and Cash Flows for the periods ended September 30, 2018 and 2017, and the Consolidated Balance Sheet as of September 30, 2018, are not audited but reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown. Certain information and note disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Because the consolidated interim financial statements do not include all of the information and notes required by GAAP for a complete set of financial statements, they should be read in conjunction with the audited consolidated financial statements and notes included in our annual report on Form 10-K for the year ended December 31, 2017. The results for the three- and nine-month periods are not necessarily indicative of a full year’s results. Significant accounting policies and practices Revenue recognition We generate revenue primarily from the sale of semiconductor products, either directly to a customer or to a distributor, or at the conclusion of a consignment process. We have a variety of types of contracts with our customers and distributors. In determining whether a contract exists, we evaluate the terms of the agreement, the relationship with the customer or distributor and their ability to pay. We recognize revenue from sales of our products, including sales to our distributors, at a point in time, generally upon shipment or delivery to the customer or distributor, depending upon the terms of the sales order. Control is considered transferred when title and risk of loss pass, when the customer becomes obligated to pay and, where required, when the customer has accepted the products. For sales to distributors, payment is due on our standard commercial terms and is not contingent upon resale of the products. Revenue from sales of our products that is subject to inventory consignment agreements is recognized at a point in time, when the customer or distributor pulls product from consignment inventory that we store at designated locations. Transfer of control occurs at that point, when title and risk of loss transfers and the customer or distributor becomes obligated to pay for the products pulled from inventory. Until the products are pulled for use or sale by the customer or distributor, we retain control over the products’ disposition, including the right to pull back or relocate the products. The amount of revenue recognized is adjusted based on allowances, which are prepared on a portfolio basis using a most likely amount methodology based on analysis of historical data, current economic conditions and contractual terms. These allowances, which are not material, generally include adjustments for pricing arrangements, product returns and incentives. The length of time between invoicing and payment is not significant under any of our payment terms. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. In addition, we record allowances for accounts receivable that we estimate may not be collected. We monitor collectability of accounts receivable primarily through review of accounts receivable aging. When collection is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, record a charge in the period such determination is made. We recognize shipping fees, if any, received from customers in revenue. We include shipping and handling costs in COR. The majority of our customers pay these fees directly to third parties. Earnings per share (EPS) Unvested share-based payment awards that contain non-forfeitable rights to receive dividends or dividend equivalents, such as our restricted stock units (RSUs), are considered to be participating securities and the two-class method is used for purposes of calculating EPS. Under the two-class method, a portion of Net income is allocated to these participating securities and, therefore, is excluded from the calculation of EPS allocated to common stock, as shown in the table below. Computation and reconciliation of earnings per common share are as follows (shares in millions):
| For Three Months Ended September 30, |
| 2018 |  |  | 2017 |
| Net |  |  |  |  |  |  |  |  |  | Net |  |  |  |  |  |  |  |
| Income |  |  | Shares |  |  | EPS |  |  | Income |  |  | Shares |  |  | EPS |
Basic EPS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income | $ |  | 1,570 |  |  |  |  |  |  |  |  |  |  |  | $ |  | 1,285 |  |  |  |  |  |  |  |  |  |
Income allocated to RSUs |  |  | (12 | ) |  |  |  |  |  |  |  |  |  |  |  |  | (11 | ) |  |  |  |  |  |  |  |  |
Income allocated to common stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
for basic EPS calculation | $ |  | 1,558 |  |  |  | 969 |  |  | $ |  | 1.61 |  |  | $ |  | 1,274 |  |  |  | 988 |  |  | $ |  | 1.29 |
Adjustment for dilutive shares: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Stock compensation plans |  |  |  |  |  |  | 20 |  |  |  |  |  |  |  |  |  |  |  |  |  | 20 |  |  |  |  |  |
Diluted EPS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income | $ |  | 1,570 |  |  |  |  |  |  |  |  |  |  |  | $ |  | 1,285 |  |  |  |  |  |  |  |  |  |
Income allocated to RSUs |  |  | (11 | ) |  |  |  |  |  |  |  |  |  |  |  |  | (11 | ) |  |  |  |  |  |  |  |  |
Income allocated to common stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
for diluted EPS calculation | $ |  | 1,559 |  |  |  | 989 |  |  | $ |  | 1.58 |  |  | $ |  | 1,274 |  |  |  | 1,008 |  |  | $ |  | 1.26 |
| For Nine Months Ended September 30, |
| 2018 |  |  | 2017 |
| Net |  |  |  |  |  |  |  |  |  | Net |  |  |  |  |  |  |  |
| Income |  |  | Shares |  |  | EPS |  |  | Income |  |  | Shares |  |  | EPS |
Basic EPS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income | $ |  | 4,341 |  |  |  |  |  |  |  |  |  |  |  | $ |  | 3,338 |  |  |  |  |  |  |  |  |  |
Income allocated to RSUs |  |  | (34 | ) |  |  |  |  |  |  |  |  |  |  |  |  | (32 | ) |  |  |  |  |  |  |  |  |
Income allocated to common stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
for basic EPS calculation | $ |  | 4,307 |  |  |  | 976 |  |  | $ |  | 4.41 |  |  | $ |  | 3,306 |  |  |  | 993 |  |  | $ |  | 3.33 |
Adjustment for dilutive shares: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Stock compensation plans |  |  |  |  |  |  | 21 |  |  |  |  |  |  |  |  |  |  |  |  |  | 21 |  |  |  |  |  |
Diluted EPS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income | $ |  | 4,341 |  |  |  |  |  |  |  |  |  |  |  | $ |  | 3,338 |  |  |  |  |  |  |  |  |  |
Income allocated to RSUs |  |  | (34 | ) |  |  |  |  |  |  |  |  |  |  |  |  | (31 | ) |  |  |  |  |  |  |  |  |
Income allocated to common stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
for diluted EPS calculation | $ |  | 4,307 |  |  |  | 997 |  |  | $ |  | 4.32 |  |  | $ |  | 3,307 |  |  |  | 1,014 |  |  | $ |  | 3.26 |
Potentially dilutive securities representing 4 million and 5 million shares of common stock that were outstanding during the third quarters of 2018 and 2017, and 4 million and 6 million shares outstanding during the first nine months of 2018 and 2017, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive. Derivatives and hedging We use derivative financial instruments to manage exposure to foreign exchange risk. These instruments are primarily forward foreign currency exchange contracts, which are used as economic hedges to reduce the earnings impact that exchange rate fluctuations may have on our non-U.S. dollar net balance sheet exposures. Gains and losses from changes in the fair value of these forward foreign currency exchange contracts are credited or charged to OI&E. We do not apply hedge accounting to our foreign currency derivative instruments. In connection with the issuance of long-term debt, we may use financial derivatives such as treasury-rate lock agreements that are recognized in AOCI and amortized over the life of the related debt. The results of these derivative transactions have not been material. We do not use derivatives for speculative or trading purposes. Fair values of financial instruments The fair values of our derivative financial instruments were not material as of September 30, 2018. Our investments in cash equivalents, short-term investments and certain long-term investments, as well as our deferred compensation liabilities, are carried at fair value. The carrying values for other current financial assets and liabilities, such as accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. The carrying value of our long-term debt approximates the fair value as measured using broker-dealer quotes, which are Level 2 inputs. See Note 4 for a description of fair value and the definition of Level 2 inputs. Changes in accounting standards – adopted standards for current period ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. We adopted Accounting Standards Codification Topic 606 (ASC 606) as of January 1, 2018, using the modified retrospective transition method applied only to contracts that were not completed as of the adoption date. The reported results for 2018 reflect the application of the new accounting guidance, while the reported results for prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under ASC 605, Revenue Recognition. The most significant impact from adopting the standard relates to our accounting for royalty income on licenses of intellectual property; however, the effect of such change during any individual reporting period will not materially impact our results of operations and financial position. Although royalty income is recorded within OI&E, the new revenue guidance applies to these agreements by analogy, and therefore, such agreements have been evaluated for ASC transition considerations. Under ASC 606, royalty income for our fixed-rate royalty agreements is bifurcated between two performance obligations: providing a right to use our initial patent portfolio and the right to access our future patents when those patents are developed. We have determined that the value of these agreements is allocated more heavily to the initial performance obligation. As a result, income from these agreements is recognized predominately at the time of contract execution rather than ratably over the life of the agreements, accelerating the timing of when we recognize royalty income in OI&E. The timing of revenue recognition, billings and cash collections may result in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities). These items are included in other current and non-current assets and liabilities on the Consolidated Balance Sheets. Generally, we invoice customers for payment upon shipment or when goods are pulled from consignment inventory, which results in an unconditional right to consideration. The time frame between when the customer places an order for products and when it is shipped is less than 12 months. Our contract assets are primarily related to our rights to consideration for satisfied or partially satisfied performance obligations on our royalty agreements for which payment has not been received as of the reporting date. We recognized an increase to opening retained earnings of $206 million, net of taxes, as of January 1, 2018, due to the cumulative impact of adopting ASC 606, primarily related to our fixed payment patent licensing agreements that were not completed as of the adoption date. A contract asset of $283 million and deferred tax liabilities of $55 million were recorded as of January 1, 2018, related to the transition period adjustments. Occasionally, as of the end of a reporting period, some performance obligations associated with contracts are unsatisfied or only partially satisfied. In accordance with the practical expedients available in the guidance, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Similarly, we do not disclose information for variable-rate consideration on our sales-based or usage-based royalties for our patent licenses. For royalty income from licensing our patent portfolios, income is allocated to performance obligations that have not yet been satisfied. The remaining performance obligations represent contracted income that has not yet been recognized, including amounts that will be invoiced and recognized as income in future periods. As of September 30, 2018, we had $68 million of remaining performance obligations that had not yet been satisfied. We expect to recognize 24 percent of our remaining performance obligations as income over the next 12 months and the remainder thereafter. As of September 30, 2018, we had contract assets of $265 million. During the nine months ended September 30, 2018, our contract assets were reduced by $18 million, due to $30 million of cash received offset by $12 million of income recognized. We incur commission expenses paid to internal sales personnel that are incremental to obtaining contracts with customers. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are included in SG&A. Other standards The following standards were adopted during the current period and did not have a material impact on our financial position and results of operations:
ASU |  | Description |  | Adopted Date
ASU No. 2016-01 |  | Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities |  | January 1, 2018
ASU No. 2017-01 |  | Business Combinations (Topic 805): Clarifying the Definition of a Business |  | January 1, 2018
ASU No. 2017-05 |  | Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets |  | January 1, 2018
Changes in accounting standards – standards not yet adopted ASU No. 2016-02, Leases (Topic 842) This standard requires all leases that have a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a finance lease. We do not expect to have any finance leases at the time of adoption. This standard will be effective for our interim and annual periods beginning January 1, 2019. We will adopt the standard using the optional transition method and apply the guidance to leases existing at, or entered into after, the beginning of the period of adoption, as well as certain practical expedients permitted under the transition guidance. We are currently evaluating the potential impact of this standard on our financial position, but we do not expect it to have a material impact on our results of operations. ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments This standard requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of having been incurred. There are other provisions within the standard that affect how impairments of other financial assets may be recorded and presented, and that expand disclosures. This standard will be effective for our interim and annual periods beginning January 1, 2020, with early adoption permitted beginning January 1, 2019, and must be applied on a modified retrospective basis. We are currently evaluating the potential impact of this standard, but we do not expect it to have a material impact on our financial position and results of operations. ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income This standard allows a reclassification of stranded tax effects as a result of the U.S. Tax Cuts and Jobs Act (the Tax Act) from accumulated other comprehensive income to retained earnings. The provisions from this guidance are effective for interim and annual periods beginning after January 1, 2019. Early adoption is permitted. This standard should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the Tax Act are recognized. We plan to adopt this standard during the interim period in which we complete our accounting for the tax effects of the enactment of the Tax Act, applying the guidance to the period of adoption. This standard will have no impact on our results of operations. We are currently evaluating the potential impact of this standard on our financial position. Other standards We are currently evaluating the impact of the following standards, but we do not expect them to have a material impact on our financial position and results of operations. We currently plan to adopt these standards as of their effective dates.
ASU |  | Description |  | Effective Date
ASU No. 2018-13 |  | Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement |  | January 1, 2020
ASU No. 2018-14 |  | Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans |  | January 1, 2020
ASU No. 2018-15 |  | Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract |  | January 1, 2020

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- Definition The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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