Intel 2007 Annual Report Download - page 36

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Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
Inventory
The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable
quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. The
demand forecast is included in the development of our short-term manufacturing plans to enable consistency between
inventory valuation and build decisions. Product-specific facts and circumstances reviewed in the inventory valuation process
include a review of the customer base, the stage of the product life cycle of our products, consumer confidence, and customer
acceptance of our products, as well as an assessment of the selling price in relation to the product cost. If our demand forecast
for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, or if we fail to
forecast the demand accurately, we could be required to write off inventory, which would negatively impact our gross margin.
Share
-Based Compensation
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), “Shared-Based Payment” (SFAS No. 123(R)). SFAS No. 123(R) requires employee equity awards to be
accounted for under the fair value method. Total share-based compensation during 2007 was $952 million ($1.4 billion in
2006). Determining the appropriate fair-value model and calculating the fair value of employee stock options and rights to
purchase shares under stock purchase plans at the date of grant require judgment. We use the Black-Scholes option pricing
model to estimate the fair value of these share-based awards consistent with the provisions of SFAS No. 123(R). Option
pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility,
expected life, expected dividend rate, and expected risk-free rate of return. The assumptions for expected volatility and
expected life are the two assumptions that significantly affect the grant date fair value. Changes in the expected dividend rate
and expected risk-free rate of return do not significantly impact the calculation of fair value, and determining these inputs is
not highly subjective.
We use implied volatility based on freely traded options in the open market, as we believe implied volatility is more reflective
of market conditions and a better indicator of expected volatility than historical volatility. In determining the appropriateness
of implied volatility, we considered the following:
Due to significant differences in the vesting terms and contractual life of current option grants compared to the majority of our
historical grants, management does not believe that our historical share option exercise data provides us with sufficient
evidence to estimate expected term. Therefore, we use the simplified method of calculating expected life described in the
SEC’s Staff Accounting Bulletin 107 (SAB 107). In December 2007, the SEC issued Staff Accounting Bulletin 110
(SAB 110) to amend the SEC’s views discussed in SAB 107 regarding the use of the simplified method in developing an
estimate of expected life of share options in accordance with SFAS No. 123(R). SAB 110 is effective for us beginning in the
first quarter of fiscal year 2008. We will continue to use the simplified method until we have the historical data necessary to
provide a reasonable estimate of expected life, in accordance with SAB 107, as amended by SAB 110.
30
•
the volume of market activity of freely traded options, and determined that there was sufficient market activity;
• the ability to reasonably match the input variables of freely traded options to those of options granted by the company,
such as the date of grant and the exercise price, and determined that the input assumptions were comparable; and
• the term of freely traded options used to derive implied volatility, which is generally one to two years, and determined
that the length of term was sufficient.