AMD 2007 Annual Report Download - page 56

Table of Contents
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 include development of next generation GPU, chipset, handheld and digital TV products. As of the date of acquisition, 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) and we expect to incur an aggregate of approximately $113 million ($86 million for graphics products and $27 million for chipset products) to
complete these projects over the two-year period that commenced October 25, 2006. As of the date of the acquisition, the estimated fair value of the projects for
the Consumer Electronics segment was approximately $223 million, and we expect to incur aggregate costs of approximately $102 million to complete these
projects over the two-year period that commenced October 25, 2006. Starting in the first quarter of 2007, in conjunction with the integration of ATI’s operations,
we reported operations related to our chipset products in our 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 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, 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, which could have a material adverse impact on our
business and operating results, could negatively impact the return on investment that we expected at the time that the ATI acquisition was completed and may
result in impairment charges.
The estimates used in valuing IPR&D were based upon assumptions believed to be reasonable but which are inherently uncertain, and as a result, actual
results may differ from estimates.
The development efforts on these acquired projects have been ongoing and there have not been any significant changes in the original development plans
as of December 29, 2007.
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 product divisions. We initially expected the developed technology to have an average useful life of
five years. However, as discussed below, we have revised the estimate of the average useful life of the developed technology to be 50 months from the
acquisition date.
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Source: ADVANCED MICRO DEVIC, 10-K, February 26, 2008