AMD 2006 Annual Report Download - page 63

Table of Contents
We believe the following critical accounting estimates are the most significant to the presentation of our financial statements and require the most difficult,
subjective and complex judgments.
Revenue Reserves. We record a provision for estimated sales returns and allowances on product sales for estimated future price reductions and other
customer incentives in the same period that the related revenues are recorded. We base these estimates on actual historical sales returns, allowances, historical
price reductions, market activity, and other known or anticipated trends and factors. These estimates are subject to management’s judgment, and actual provisions
could be different from our estimates and current provisions, resulting in future adjustments to our revenues and operating results.
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 margin 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.
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.
Goodwill. As a result of the ATI acquisition, we recorded approximately $3.2 billion of goodwill on our books. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, we are required to review goodwill for impairment at least annually or more often if there are indicators of impairment
present. We will perform our annual impairment analysis during the fourth quarter of each year, with the first impairment test related to ATI goodwill to be
performed during the fourth quarter of 2007. The provisions of SFAS 142 require that a two-step impairment test be performed on goodwill. In the first step, we
will compare the fair value of each reporting unit to which goodwill has been allocated to its carrying value. If the fair value of the reporting unit exceeds the
carrying value of the net assets assigned to that unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value
of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to
determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would
record an impairment loss equal to the difference.
Determining the number of reporting units and the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates
and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows,
risk-adjusted
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Source: ADVANCED MICRO DEVIC, 10-K, March 01, 2007