AMD 2007 Annual Report Download - page 59

Table of Contents
would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross margin in that period.
Business Combinations. In accordance with business combination accounting, we have allocated the purchase price of ATI to tangible and acquisition
related intangible assets acquired, including in-process research and development, and liabilities assumed based on their estimated fair values. These valuations
require us to make significant estimates and assumptions, especially with respect to acquisition related intangible assets.
We review the acquisition related intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of these
assets may not be recovered.
We made estimates of fair value of the ATI assets acquired and liabilities assumed using reasonable assumptions based on historical experience and
information obtained from the management of the acquired company. Critical estimates in valuing certain of the acquisition related intangible assets included but
were not limited to: future expected cash flows from the sale of products, expected costs to develop in-process research and development projects into
commercially viable products and estimated cash flows from the projects when completed; the market’s awareness of the acquired company’s brand and the
acquired company’s market position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s
product portfolio and discount rates. Unanticipated events may occur which may affect the accuracy or validity of such assumptions, estimates or actual results as
evidenced by the impairment charges we recorded with respect to goodwill and intangible assets resulting from the ATI acquisition.
Goodwill. As a result of the ATI acquisition, we recorded goodwill on our books. In accordance with FASB Statement No. 142, Goodwill and Other
Intangible Assets (SFAS 142), we are required to review goodwill for impairment at least annually or more often if there are indicators of impairment present.
We perform our annual impairment analysis during the fourth quarter of each year. The provisions of SFAS 142 require that a two-step impairment test be
performed on goodwill. In the first step, we 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 discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on
assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition,
we make judgments and assumptions in allocating assets and liabilities to each of our reporting units.
As a result of the annual goodwill impairment analysis, we were required to recognize a $1.3 billion goodwill impairment charge in our 2007 statement of
operations related to three of our reporting units in the Graphics and Consumer Electronics segments. The key assumptions used to determine the fair value of
our reporting units included: (a) cash flow periods of 10 years; (b) terminal values based upon terminal growth rates ranging from 3.0 percent to 7.0 percent; and
(c) discount rates ranging from 13.1 percent to 15.3 percent which were based on our weighted average cost of capital, adjusted for the risks associated with the
operations. A variance in the discount rate could have had a significant impact on the amount of the goodwill impairment charge recorded. We cannot predict the
occurrence of certain future events that might adversely affect the reported value of goodwill, which totaled $1.9 billion at December 29, 2007. Such events
include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the
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Source: ADVANCED MICRO DEVIC, 10-K, February 26, 2008