AMD 2003 Annual Report Download - page 26

Table of Contents
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including
those related to our revenues, inventories, asset impairments, restructuring charges, income taxes and commitments and contingencies. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s
expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
We believe the following critical accounting policies are the most significant to the presentation of our financial statements and require the most difficult,
subjective and complex judgments.
Revenue Reserves. We record a provision for estimated sales returns and allowances on product sales and a provision for estimated future price
reductions in the same period that the related revenues are recorded. We base these estimates on management judgment while considering actual historical sales
returns, historical price reductions, market activity, allowances, and other known or anticipated trends and factors. Actual provisions could be different from our
estimates and current provisions, resulting in future adjustments to our revenues and operating results.
Inventory Valuation. At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes
analysis of sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory and are also
used for near-term factory production planning. Inventories on hand in excess of forecasted demand of generally six months or less, are not valued. In addition,
we write off inventories that are considered obsolete. Among other factors, management considers forecasted demand in relation to the inventory on hand,
competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. We adjust remaining
inventory balances to approximate the lower of our standard manufacturing cost or market value. If we anticipate future demand or market conditions to be less
favorable than our projections as forecasted, additional inventory write-downs may be required, and would be reflected in cost of sales in the period the revision
is made. This would have a negative impact on our gross margins in that period. If in any period we are able to sell inventories that were not valued or that had
been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross
margin in that period. To the extent these factors materially affect our gross margins, we would disclose them.
Impairment of Long-Lived Assets. We consider no less frequently than quarterly whether indicators of impairment of long-lived assets are present. These
indicators may include, but are not limited to, significant decreases in the market value of an asset and significant changes in the extent or manner in which an
asset is used. If these or other indicators are present, we determine whether the estimated undiscounted cash flows attributable to the assets in question are less
than their carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair
value is determined by discounted future cash flows, appraisals or other methods. If the asset determined to be impaired is to be held and used, we recognize an
impairment loss through a charge to our operating results to the extent the present value of anticipated net cash flows attributable to the asset is less than the
asset’s carrying value, which we depreciate over the remaining estimated useful life of the asset. We may incur additional impairment losses in future periods if
factors influencing our estimates of the undiscounted cash flows change.
Restructuring Charges. We record and account for our restructuring activities following formally approved plans that identify the actions and timeline
over which the restructuring activities will occur. Restructuring charges include estimates pertaining to employee severance and fringe benefit costs, facility exit
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Source: ADVANCED MICRO DEVIC, 10-K, March 09, 2004