Intel 2009 Annual Report Download - page 36

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Income Taxes
We must make estimates and judgments in determining income tax expense for financial statement purposes. These estimates
and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and
liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement
purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes in these estimates may
result in an increase or decrease to our tax provision in a subsequent period.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must
increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not
ultimately be recoverable. We believe that we will ultimately recover a majority of the deferred tax assets recorded on our
consolidated balance sheets. However, should there be a change in our ability to recover our deferred tax assets, our tax
provision would increase in the period in which we determined that the recovery was not likely. Recovery of a portion of our
deferred tax assets is impacted by management’s plans with respect to holding or disposing of certain investments; therefore,
changes in management’s plans with respect to holding or disposing of investments could affect our future provision for taxes.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We
recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position
will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the
largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to
estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain
tax positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax
law, new audit activity, and effectively settled issues. Determining whether an uncertain tax position is effectively settled
requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an
additional charge to the tax provision.
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
estimate of future demand is compared to work-in-process and finished goods inventory levels to determine the amount, if
any, of obsolete or excess inventory. As of December 26, 2009, we had total work-in-process inventory of $1,469 million and
total finished goods inventory of $1,029 million. 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, we could be required to write off inventory, which would negatively impact our
gross margin.
In order to determine what costs can be included in the valuation of inventory, we must determine normal capacity at our
manufacturing and assembly and test facilities, based on historical loadings of wafers compared to total available capacity. If
the factory loadings are below the established normal capacity level, a portion of our manufacturing overhead costs would not
be included in the cost of inventory, and therefore would be recognized as cost of sales in that period, which would negatively
impact our gross margin. We refer to these costs as excess capacity charges. Over the past 12 quarters, excess capacity charges
ranged from zero to $680 million per quarter.
Accounting Changes and Recent Accounting Standards
For a description of accounting changes and recent accounting standards, including the expected dates of adoption and
estimated effects, if any, on our consolidated financial statements, see “Note 3: Accounting Changes” and “Note 4: Recent
Accounting Standards” in Part II, Item 8 of this Form 10-K.
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