AMD 2011 Annual Report Download - page 52

Amended Wafer Supply Agreement
On April 2, 2011, we amended the WSA. The primary effect of the amendment was to change the pricing
methodology applicable to wafers delivered in 2011 for our microprocessors, including APU products. The
amendment also modified our existing commitments regarding the production of certain GPU and chipset
products at GF. Pursuant to the amendment, GF committed to provide us with, and we committed to purchase, a
fixed number of 45nm and 32nm wafers per quarter in 2011. We paid GF a fixed price for 45nm wafers delivered
in 2011. Our price for 32nm wafers varied based on the wafer volumes and manufacturing yield of such wafers
and was based on good die. In addition, we also agreed to pay an additional quarterly amount to GF during 2012
totaling up to $430 million if GF met specified conditions related to continued availability of 32nm capacity as of
the beginning of 2012. Under the current terms of the WSA, in 2012, we will compensate GF on a cost plus basis
for projected manufacturing capacity that we have requested for our microprocessors, including APU products.
However, we are currently in the process of negotiating a second amendment to the WSA, including the pricing
methodology.
Critical Accounting Estimates
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 U.S. generally accepted
accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts in our consolidated financial statements. 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, actual
results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
We believe the following critical accounting estimates are the most significant to the presentation of our
financial statements and require the most difficult, subjective and complex judgments.
Revenue Allowances. We record a provision for estimated sales returns and allowances on product sales
for estimated future price reductions and other customer incentives in the same period that the related revenues
are recorded. We base these estimates on actual historical sales returns, allowances, historical price reductions,
market activity, and other known or anticipated trends and factors. These estimates are subject to management’s
judgment, and 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. Generally, inventories on hand in
excess of forecasted demand for the next two quarters are not valued. In addition, we write off inventories that
are considered obsolete. We adjust the remaining specific inventory balances to approximate the lower of our
standard manufacturing cost or market value. 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. If, in any period, we anticipate future demand or market
conditions to be less favorable than our previous estimates, 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 margin 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.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of net tangible and
identifiable intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment at least
annually, or more frequently if there are indicators of impairment present.
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