AMD 2006 Annual Report Download - page 61

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The primary areas of purchase price allocation that are not yet finalized relate to ATI-related exit costs, certain liabilities assumed, certain legal matters
discussed in “Part I, Item 3, Legal Proceedings” and tax related contingencies. Resolution of ATI tax-related contingencies for amounts different than amounts
recorded as of the close of the acquisition will result in adjustments to goodwill. Adjustments to amounts recorded as of the close of the acquisition related to the
finalization of ATI-related exit costs and resolution of certain ATI legal contingencies will result in adjustments to goodwill or will be recorded in
post-acquisition operating results, depending on the nature and timing of such adjustments.
Management performed an analysis to determine the fair value of each tangible and identifiable intangible asset, including the portion of the purchase price
attributable to acquired in-process research and development projects.
In-Process Research and Development
Of the total purchase price, approximately $416 million was allocated to in-process research and development (IPR&D) and was expensed in the fourth
quarter of fiscal year 2006. Projects that qualify as IPR&D represent those that have not reached technological feasibility and have no alternative future use at the
time of the acquisition. 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 for ATI 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.
We acquired and intend to continue developing approximately $306 million and $325 million in-process projects in the Graphics and Chipsets segment,
and the Consumer Electronics segment. These projects include development of next generation GPU, chipset, handheld and digital TV products. The estimated
fair value of the projects for the Graphics and Chipsets segment was approximately $193 million and we expect to incur approximately $113 million to complete
these projects over the next two years. The estimated fair value of the projects for the Consumer Electronics segment was approximately $223 million and we
expect to incur approximately $102 million to complete these projects over the next two years. In developing the estimated fair values, we used discount rates
ranging from 14 percent to 15 percent.
The development of these technologies remains a risk due to the remaining efforts to achieve technical viability, rapidly changing customer markets,
uncertain standards for new products, and significant competitive threats from our competitors. Failure to develop these technologies into commercially viable
products and/or failure to bring them to market in a timely manner could result in a loss of market share and could have a material adverse impact on our business
and operating results and could negatively impact the return on investment expected at the time that this acquisition was completed and may result in impairment
charges.
The estimates used in valuing these IPR&D were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable,
and, as a result, actual results may differ from estimates.
There have not been any significant changes in the status of the efforts to complete these projects as of December 31, 2006.
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Source: ADVANCED MICRO DEVIC, 10-K, March 01, 2007