AMD 2008 Annual Report Download - page 66

Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an
on-going basis, including those related to our revenues, inventories, asset impairments, goodwill, business
combinations, use of fair value measurements and income taxes. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities. Although actual results
have historically been reasonably consistent with management’s expectations, actual results may differ from
these estimates or our estimates may be affected by different assumptions or conditions.
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 the 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, in any period, we anticipate future demand or market conditions to be less favorable than our previous
estimates, 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.
Business Combinations. In accordance with business combination accounting, we have allocated the
purchase price of ATI to related tangible and 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
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