3Ware 2004 Annual Report Download - page 80

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APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company performs its annual impairment review during the fourth quarter each fiscal year or more
frequently if the Company believes indicators of impairment are present. FAS 142 requires that goodwill and
certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically,
goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is
used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount,
including goodwill. Goodwill is allocated to reporting units based the type of products under development by the
acquisition, which initially generated the goodwill. If the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is
unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill
impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair
value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the
reporting unit was the purchase price paid to acquire the reporting unit. The fair value is determined using both a
discounted cash flow analysis as well as market comparisons, if available. The determination of fair value
requires significant judgment and estimates.
Research and Development
Research and development costs are expensed as incurred. Substantially all research and development
expenses are related to new product development and designing significant improvements to existing products.
Advertising Cost
Advertising costs are expensed as incurred.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as set forth in SFAS No. 109,
“Accounting for Income Taxes”. Under the liability method, deferred taxes are determined based on the
temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax
rates. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will
not be realized.
Stock-Based Compensation
The Company has in effect several stock option plans under which non-qualified and incentive stock options
have been granted to employees and non-employee directors. The Company also has in effect an employee stock
purchase plan. The Company accounts for stock-based awards to employees in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and the related
Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation—An Interpretation
of APB Opinion No. 25”.The Company has adopted the disclosure-only alternative of SFAS 123, “Accounting
for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure” (“SFAS 148”).
F-10