3Ware 2005 Annual Report Download - page 71

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Warranty Reserves
The Company generally provides a one year warranty on production released semi-conductor products and
up to three years on board level products. Estimated expenses for warranty obligations are accrued as revenue is
recognized. Reserve estimates are adjusted periodically to reflect actual experience.
Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets
ranging from 3 to 31.5 years using the straight line method. Leasehold improvements are stated at cost and
amortized over the shorter of the term of the related lease or its estimated useful life. Property and equipment
under capital leases are recorded at the net present value of the minimum lease payments and are amortized over
the useful lives of the assets.
Goodwill and Purchased Intangible Assets
Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of the identified
net tangible and intangible assets acquired. Other purchased intangible assets, including such items as developed
technology and trademarks, are amortized on a straight-line basis over the estimated remaining useful lives of the
respective assets, ranging from one to ten years.
In accordance with SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company
performs its annual impairment review at the reporting unit level during the fourth quarter each fiscal year or
more frequently if the Company believes indicators of impairment are present. SFAS 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 upon the type of products under development
by the acquired Company, 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 a combination of the discounted cash flow analysis as well as market comparisons, if available. The
determination of fair value requires significant judgment and estimates.
The Company accounts for long-lived assets, including other purchased intangible assets, in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), which
requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment
are present. Reviews are performed to determine whether the carrying value of an asset is impaired, based on
comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment,
the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices
and/or (ii) discounted expected future cash flows. Impairment is based on the excess of the carrying amount over
the fair value of those assets.
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