AMD 2014 Annual Report Download - page 50

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Management believes 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, historical 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 revenue and operating results.
Inventory Valuation. At each balance sheet date, we evaluate our ending inventories for excess quantities
and obsolescence based on projected sales outlook. This evaluation includes analysis of historical sales levels by
product and projections of future demand. These projections assist us in determining the carrying value of our
inventory. In addition, we write off inventories that we consider 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 market 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 down 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.
We perform an annual goodwill impairment analysis as of the first day of the fourth quarter of each year.
We evaluate whether goodwill has been impaired at the reporting unit level by first determining whether the
estimated fair value of the reporting unit is less than its carrying value and, if so, by determining whether the
implied fair value of goodwill within the reporting unit is less than the carrying value. The implied fair value of a
reporting unit is determined through the application of one or more valuation models common to our industry,
including the income, market and cost approaches. While market valuation data for comparable companies is
gathered and analyzed, we believe that there has not been sufficient comparability between the peer groups and
the specific reporting units to allow for the derivation of reliable indications of value using a market approach.
Therefore, we have ultimately employed the income approach which requires estimates of present value of
estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates
and operating margins, taking into consideration industry and market condition. The key assumptions we have
used to determine the fair value of our reporting units includes projected cash flows for the next 10 years and
discount rates ranging from 13% to 19% from 2012 to 2014. The discount rate used is based on the weighted-
average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the
uncertainty related to the reporting unit’s ability to execute on the projected cash flows. A variance in the
discount rate could have a significant impact on the amount of the goodwill impairment charge recorded, if any.
Estimating the fair value of a reporting unit is judgmental in nature and involves the use of significant
estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins
used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions
and the determination of appropriate comparable publicly-traded companies. In addition, we make certain
judgments and assumptions in allocating shared assets and liabilities to individual reporting units to determine
the carrying amount of each reporting unit.
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