AMD 2006 Annual Report Download - page 111

Table of Contents
IPR&D represent those that have not reached technological feasibility and have no alternative future use at the time of the acquisition. These projects included
development of next generation products for the Graphics and Chipsets segment and the Consumer Electronics segment. The estimated fair value of the projects
for the Graphics and Chipsets segment was approximately $193 million. The estimated fair value of the projects for the Consumer Electronics segment was
approximately $223 million.
The value assigned to IPR&D was determined using a discounted cash flow methodology, specifically an excess earnings approach, which estimates value
based upon the discounted value of future cash flows expected to be generated by the in-process projects, net of all contributory asset returns. The approach
includes consideration of the importance of each project to the overall development plan, estimating costs to develop the purchased IPR&D into commercially
viable products. The revenue estimates used to value the purchased IPR&D were based on estimates of the relevant market sizes and growth factors, expected
trends in technology and the nature and expected timing of new product introductions by ATI and its competitors.
The discount rates applied to individual projects were selected after consideration of the overall estimated weighted average cost of capital and the
discount rates applied to the valuation of the other assets acquired. Such weighted average cost of capital was adjusted to reflect the difficulties and uncertainties
in completing each project and thereby achieving technological feasibility, the percentage of completion of each project, anticipated market acceptance and
penetration, market growth rates and risks related to the impact of potential changes in future target markets. In developing the estimated fair values, the
Company used discount rates ranging from 14 percent to 15 percent.
Other Acquisition Related Intangible Assets
Developed product technology comprises products that have reached technological feasibility, and includes technology in ATI’s discrete GPU products,
integrated chipset products, handheld products, and digital TV products divisions. This intangible asset was estimated to have a useful life of five years.
Game console royalty agreements represent agreements existing as of October 24, 2006 with video game console manufacturers for the payment of
royalties to ATI for intellectual property design work performed, and were estimated to have an average useful life of five years.
Customer relationship intangibles represent ATI’s customer relationships existing as of October 24, 2006 and were estimated to have an average useful life
of four years.
Trademarks and trade names are estimated to have an average useful life of seven years.
Customer backlog represents customer orders existing as of October 24, 2006 that had not been delivered and were estimated to have a useful life of 14
months.
The Company determined the fair value of intangible assets using income approaches and based the rates on the most current financial forecast available as
of October 24, 2006. The discount rates used to discount net cash flows to their present values ranged from 12 percent to 15 percent. The Company determined
these discount rates after consideration of the Company’s estimated weighted average cost of capital and the estimated internal rate of return specific to the
acquisition. The Company recorded the excess of the purchase price over the net tangible and identifiable intangible assets as goodwill.
The Company based estimated useful lives for the intangible assets on historical experience with technology life cycles, product roadmaps and the
Company’s intended future use of the intangible assets. The Company amortizes acquisition related intangible assets using the straight-line method over their
estimated useful lives.
Concurrent with the acquisition, the Company implemented an integration plan which included the termination of some ATI employees, the relocation or
transfer to other sites of other ATI employees and the
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Source: ADVANCED MICRO DEVIC, 10-K, March 01, 2007