AMD 2005 Annual Report Download - page 86

Table of Contents
with distributors may contain standard stock rotation provisions permitting limited levels of product returns. Accordingly, the Company defers the gross margin
resulting from the deferral of both revenue and related product costs from sales to distributors with agreements that have the aforementioned terms until the
merchandise is resold by the distributors. The Company also sells its products to distributors with substantial independent operations under sales arrangements
whose terms do not allow for rights of return or price protection on unsold products held by them. In these instances, the Company recognizes revenue when it
ships the product directly to the distributors. The Company records estimated reductions to revenue under distributor and customer incentive programs, including
certain cooperative advertising and marketing promotions and volume based incentives and special pricing arrangements, at the time the related revenues are
recognized. For transactions where the Company reimburses a customer for a portion of the customer’s cost to perform specific product advertising or marketing
and promotional activities, such amounts are recorded as a reduction of revenue unless they qualify for cost recognition under Emerging Issues Task Force
(EITF) Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” Shipping and
handling costs associated with product sales are included in cost of sales.
Inventories. Inventories are stated at standard cost adjusted to approximate the lower of actual cost (first-in, first-out method) or market (net realizable
value). Generally, inventories on hand in excess of forecasted demand for the next six months are not valued. Obsolete inventories are written off.
Impairment of Long-Lived Assets. For long-lived assets used in operations, the Company records impairment losses when events and circumstances
indicate that these assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those
assets. If less, the impairment losses are based on the excess of the carrying amounts of these assets over their respective fair values. Their fair values would then
become the new cost basis. Fair value is determined by discounted future cash flows, appraisals or other methods. For assets held for sale, impairment losses are
measured at the lower of the carrying amount of the assets or the fair value of the assets less costs to sell. For assets to be disposed of other than by sale,
impairment losses are measured as their carrying amount less salvage value, if any, at the time the assets cease to be used.
Commitments and Contingencies. From time to time the Company is a defendant or plaintiff in various legal actions that arise in the normal course of
business. The Company is also a party to environmental matters, including local, regional, state and federal government cleanup activities at or near locations
where the Company currently or has in the past conducted business. The Company is also a guarantor of various third-party obligations and commitments. The
Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A
determination of the amount of reserves required for these commitments and contingencies, if any, that would be charged to earnings, includes assessing the
probability of adverse outcomes and estimating the amount of potential losses. The required reserves, if any, may change in the future due to new developments
in each matter or changes in circumstances, such as a change in settlement strategy. Changes in required reserves could increase or decrease our earnings in the
period the changes are made. (See Note 16.)
Cash Equivalents. Cash equivalents consist of financial instruments that are readily convertible into cash and have original maturities of three months or
less at the time of acquisition.
Investments. The Company classifies its marketable debt and equity securities at the date of acquisition as either held to maturity or available for sale.
Substantially all of the Company’s investments in marketable debt and equity securities are classified as available-for-sale. These securities are reported at fair
market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), net of tax, a component of stockholders
equity. Realized gains and losses and declines in the value of securities determined to be other-than-temporary are included in interest and other income
(expense), net. The cost of securities sold is based on the specific identification method.
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Source: ADVANCED MICRO DEVIC, 10-K, February 27, 2006