AMD 2007 Annual Report Download - page 108

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The only item that may significantly impact goodwill is the resolution of certain ATI tax-related contingencies. To the extent that the actual amounts are
different than the estimated amounts initially recorded, the difference will result in adjustments to goodwill. Any other adjustments to amounts recorded from and
after the completion of the acquisition will be recorded in post-acquisition operating results.
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 2006. Projects that qualify as IPR&D represent those that have not reached technological feasibility and had 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 ($122 million for graphics products and $71 million
for chipset products). The estimated fair value of the projects for the Consumer Electronics segment was approximately $223 million. Starting in the first quarter
of 2007, in conjunction with the integration of ATI’s operations, the Company reported operations related to its chipset products in its Computing Solutions
segment.
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 and 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. 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 consists of 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. The Company initially expected the developed technology to have an average
useful life of five years. However, as discussed below, the Company has revised the estimate of the average useful life of the developed technology to be 50
months from the acquisition date.
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.
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Source: ADVANCED MICRO DEVIC, 10-K, February 26, 2008