AMD 2005 Annual Report Download - page 31

Table of Contents
Inventory Valuation. At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes
analysis of sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory and are also
used for near-term factory production planning. Generally, inventories on hand in excess of forecasted demand for the next six months are not valued. In
addition, we write off inventories that are considered obsolete. We adjust remaining specific inventory balances to approximate the lower of our standard
manufacturing cost or market value. Among other factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of
product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. If we anticipate future demand or market
conditions to be less favorable than our projections as forecasted, additional inventory write-downs may be required and would be reflected in cost of sales in the
period the revision is made. This would have a negative impact on our gross margins in that period. If in any period we are able to sell inventories that were not
valued or that had been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net
benefit to our gross margin in that period. To the extent these factors materially affect our gross margins, we would disclose them in our filings with the SEC.
Impairment of Long-Lived Assets. We consider no less frequently than quarterly whether indicators of impairment of long-lived assets are present. These
indicators may include, but are not limited to, significant decreases in the market value of an asset and significant changes in the extent or manner in which an
asset is used. If these or other indicators are present, we determine whether the estimated undiscounted cash flows attributable to the assets in question are less
than their carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair
value is determined by discounted future cash flows, appraisals or other methods. If the asset determined to be impaired is to be held and used, we recognize an
impairment loss through a charge to our operating results which also reduces the carrying basis of the related asset(s). The new carrying value of the related
asset(s) is depreciated over the remaining estimated useful life of the asset(s). We may incur additional impairment losses in future periods if factors influencing
our estimates of the undiscounted cash flows change.
Income Taxes. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates
and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from
temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.
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 charge to income tax expense, in the form of a valuation allowance, for the deferred tax assets that we estimate will not ultimately be recoverable. We
consider past performance, future expected taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. As
of December 25, 2005, all of our U.S. deferred tax assets, net of deferred tax liabilities are subject to a full valuation allowance, which was initially established in
the fourth quarter of 2002. The realization of these assets is dependent on substantial future taxable income which, at December 25, 2005, in management’s
estimate, is not more likely than not to be achieved. In 2005, the valuation allowance increased primarily due to the continuation of start-up losses at Fab 36 in
Germany net of utilization of valuation allowance as a result of operating profits in the U.S. If we in the future determine that it is more likely than not that the
net deferred tax assets will be realized, an appropriate amount of the previously provided valuation allowance will be reversed, resulting in a benefit to our
operating results. Such benefits would be recorded on the income tax (benefit) provision line of our statement of operations.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future
adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing jurisdiction. If our estimates of these taxes are greater or less than actual
results, an additional tax benefit or charge will result.
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Source: ADVANCED MICRO DEVIC, 10-K, February 27, 2006