Avid 2006 Annual Report Download - page 42

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Inventories
Inventory in the digital media market, including our inventory, is subject to rapid technological change or
obsolescence. We regularly review inventory quantities on hand and write down inventory to its realizable value to
reflect estimated obsolescence or lack of marketability based upon assumptions about future inventory demand
(generally for the following twelve months) and market conditions. If actual future demand or market conditions are
less favorable than we estimate, additional inventory write-downs may be required.
Business Combinations
When we acquire new businesses, we allocate the purchase price of businesses acquired to the assets, including
intangible assets, and the liabilities assumed based on their estimated fair values, with any amount in excess of
such allocations designated as goodwill. Significant management judgments and assumptions are required in
determining the fair value of acquired assets and liabilities, particularly acquired intangible assets. For example, it is
necessary to estimate the portion of development efforts that are associated with technology that is in process and
has no alternative future use. The valuation of purchased intangible assets is based upon estimates of the future
performance and cash flows from the acquired business. If different assumptions are used, it could materially impact
the purchase price allocation and our financial position and results of operations.
Goodwill and Intangible Assets
We assess the impairment of goodwill and identifiable intangible assets on at least an annual basis and whenever
events or changes in circumstances indicate that the carrying value of the asset may not be fully recoverable.
Factors we consider important that could trigger an impairment review include significant underperformance
relative to the historical or projected future operating results, significant negative industry or economic trends,
unanticipated competition, loss of key personnel, a more-likely-than-not expectation that a reporting unit or
component thereof will be sold or otherwise disposed of, significant changes in the manner of use of the acquired
assets or the strategy for our overall business, a significant decline in our stock price for a sustained period, a
reduction of our market capitalization relative to our net book value and other such circumstances.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we do not amortize goodwill and
certain indefinite-lived intangible assets. The goodwill impairment test prescribed by SFAS No. 142 requires us to
identify reporting units and to determine estimates of the fair values of our reporting units as of the date we test
for impairment. Our organizational structure is based on strategic business units that offer various products to the
principal markets in which our products are sold: Professional Video, Audio and Consumer Video. Our reporting
units equate to these strategic business units. All three of the reporting units include goodwill.
We complete our annual impairment tests as of the end of the fourth quarter of each year. In our goodwill
impairment analysis, the fair value of each reporting unit is compared to its carrying value, including goodwill. We
generally use a discounted cash flow valuation model to determine the fair values of our reporting units. This model
focuses on estimates of future revenues and profits for each reporting unit and also assumes a terminal value for the
unit based on a multiple of revenue. We estimate these amounts by evaluating historical trends, current budgets,
operating plans and industry data. For reporting units comprised primarily of acquired businesses, we utilize the
same technique as was used to value the acquisition assuming it is consistent with the objective of measuring
fair value. If the reporting unit’s carrying value exceeds its fair value, we would record an impairment loss equal
to the difference between the carrying value of the goodwill and its implied fair value. In the fourth quarter of
2006, our impairment testing determined that the carrying value of our Consumer Video reporting unit exceeded
its fair value. The fair value of the Consumer Video unit was based on a multiple-of-revenue technique similar to
that used in valuing the Pinnacle acquisition, updated for current revenue projections. The estimated fair value
was then allocated among all the assets and liabilities of the Consumer Video business, with the excess fair value
representing the implied fair value of goodwill. Because the book value of Consumer Video’s goodwill exceeded
the implied fair value by $53 million, we recorded this amount as an impairment loss.
In our identifiable intangibles impairment analysis, if events or circumstances exist that indicate that the carrying
value of an asset may not be recoverable, the fair value of each asset is compared to its carrying value. If the asset’s
carrying value is not recoverable and exceeds its fair value, we would record an impairment loss equal to the
difference between the carrying value of the asset and its fair value. The carrying value of an asset is not recoverable