Texas Instruments 2012 Annual Report Download - page 52

ANNUAL
REPORT
TEXAS INSTRUMENTS50 • 2012 ANNUAL REPORT
Inventory valuation allowances
Inventory is valued net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. Allowances are
determined quarterly by comparing inventory levels of individual materials and parts to historical usage rates, current backlog and
estimated future sales and by analyzing the age of inventory, in order to identify specific components of inventory that are judged
unlikely to be sold. Allowances are also calculated quarterly for instances where inventoried costs for individual products are in excess
of market prices for those products. In addition to this specific identification process, statistical allowances are calculated for remaining
inventory based on historical write-offs of inventory for salability and obsolescence reasons. Actual future write-offs of inventory for
salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes
in customer demand, customer negotiations, technology shifts and other factors.
Impairment of acquisition-related intangibles and goodwill
We review acquisition-related intangible assets for impairment when certain indicators suggest the carrying amount may not be
recoverable. Factors considered include the underperformance of an asset compared with expectations and shortened useful lives due
to planned changes in the use of the assets. Recoverability is determined by comparing the carrying amount of the assets to estimated
future undiscounted cash flows. If future undiscounted cash flows are less than the carrying amount, an impairment charge would be
recognized for the excess of the carrying amount over fair value, determined by utilizing a discounted cash flow technique. Additionally,
in the case of intangible assets that will continue to be used in future periods, a shortened useful life may be utilized if appropriate,
resulting in accelerated amortization based upon the expected net realizable value of the asset at the date the asset will no longer
be utilized.
We review goodwill for impairment annually, or more frequently if certain impairment indicators arise, such as significant changes in
business climate, operating performance or competition, or upon the disposition of a significant portion of a reporting unit. A significant
amount of judgment is involved in determining if an indicator of impairment has occurred between annual test dates. This impairment
review compares the fair value for each reporting unit containing goodwill to its carrying value. Determining the fair value of a reporting
unit involves the use of significant estimates and assumptions, including projected future cash flows, discount rates based on weighted
average cost of capital and future economic and market conditions. We base our fair-value estimates on assumptions we believe to
be reasonable.
Actual cash flow amounts for future periods may differ from estimates used in impairment testing.
Business combinations
The acquisition method of accounting requires that we recognize the assets acquired and liabilities assumed at their acquisition date
fair values. Goodwill is measured as the excess of consideration transferred over the acquisition date net fair values of the assets
acquired and the liabilities assumed.
The measurement of the fair values of assets acquired and liabilities assumed requires considerable judgment. Although
independent appraisals may be used to assist in the determination of the fair values of certain assets and liabilities, those
determinations are usually based on significant estimates provided by management, such as forecasted revenue or profit. In
determining the fair value of intangible assets, an income approach is generally used and may incorporate the use of a discounted cash
flow method. In applying the discounted cash flow method, the estimated future cash flows and residual values for each intangible asset
are discounted to a present value using a discount rate based on an estimated weighted average cost of capital for the semiconductor
industry. These cash flow projections are based on management’s estimates of economic and market conditions including revenue
growth rates, operating margins, capital expenditures and working capital requirements.
While we use our best estimates and assumptions as part of the process to value assets acquired and liabilities assumed at the
acquisition date, our estimates are inherently uncertain and subject to refinement. During the measurement period, which occurs before
finalization of the purchase price allocation, changes in assumptions and estimates that result in adjustments to the fair values of
assets acquired and liabilities assumed are recorded on a retrospective basis as of the acquisition date, with the corresponding offset to
goodwill. Upon the conclusion of the measurement period, any subsequent adjustments will be recorded to our Consolidated statements
of income. The measurement period for the National acquisition concluded on December 31, 2011.