Adaptec 2006 Annual Report Download - page 53

Table of Contents
Critical Accounting Policies and Estimates
General
Management’s Discussion and Analysis of Financial Condition and Results of Operations is 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 assumptions that affect the amounts we report as assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and
liabilities. Management bases its estimates on historical experience and on various other assumptions that are reasonable in the circumstances. These estimates
could change under different assumptions or conditions.
Our significant accounting policies are outlined in Note 1 to the Consolidated Financial Statements. In management’s opinion the following critical accounting
policies require the most significant judgment and involve complex estimation. We also have other policies that we consider to be key accounting policies, such
as our policies of revenue recognition, including the deferral of revenues on sales to major distributors; however these policies do not meet the definition of
critical accounting estimates as they do not generally require us to make estimates or judgments that are difficult or subjective.
Valuation of Goodwill and Intangible Assets
The purchase method of accounting for acquisitions requires estimates and assumptions to allocate the purchase price to the fair value of net tangible and
intangible assets acquired, including in-process research and development (IPR&D). The amounts allocated to IPR&D are expensed immediately. The amounts
allocated to, and the useful lives estimated for, other intangible assets, affect future amortization. There are a number of generally accepted valuation methods
used to estimate fair value of intangible assets, and we use primarily a discounted cash flow method, which requires significant management judgment to forecast
the future operating results and to estimate the discount factors used in the analysis. If assumptions and estimates used to allocate the purchase price prove to be
inaccurate based on actual results, future asset impairment charges could be required.
Goodwill and intangible assets determined to have indefinite lives are not amortized, but are subject to an annual impairment test. To determine any goodwill
impairment, we perform a two-step process on an annual basis, or more frequently if necessary, to determine 1) whether the fair value of the relevant reporting
unit exceeds carrying value and 2) to measure the amount of an impairment loss, if any. We review our intangible assets for impairment whenever events or
changes in circumstances indicate that their carrying value may not be recoverable. Measurement of an impairment loss is based on the fair value of the asset
compared to carrying value.
During the year ended December 31, 2006, our goodwill and intangible asset balances increased significantly due to the acquisitions. We performed an annual
test for impairment of goodwill and intangible assets in the fourth quarter of 2006 and determined that there was no impairment. The assumptions used to test for
impairment, including expected revenues, discount rates, and terminal values, are highly subjective. Valuation models are sensitive to changes in assumptions,
and therefore changes in these assumptions in the future could result in significant impairment charges or changes to our expected amortization.
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Source: PMC SIERRA INC, 10-K, March 01, 2007 Powered by Morningstar® Document Research℠