AMD 2008 Annual Report Download - page 68

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not
likely, we must increase our charge to income tax expense, in the form of a valuation allowance, for the deferred
tax assets that we estimate will not ultimately be recoverable. We consider past performance, future expected
taxable income and prudent and feasible tax planning strategies in determining the need for a valuation
allowance.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue
Service or other taxing jurisdiction. If our estimates of these taxes are greater or less than actual results, an
additional tax benefit or charge will result.
Fair Value Measurements. Effective December 30, 2007, we adopted FASB Statement No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value
and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements and accordingly, does not require any new fair value
measurements.
The fair values of our financial instruments reflect the estimates of amounts that would be received from
selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date (exit price). The fair value estimates presented in our consolidated financial statements are
based on information available to us as of December 27, 2008 and December 29, 2007.
In accordance with SFAS 157, we apply a fair value hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used to measure fair value. The three
levels are the following:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities.
We measure our cash equivalents, marketable securities and foreign currency derivative contracts at fair
value. Cash equivalents and marketable securities are primarily classified within Level 1 or Level 2, with the
exception of auction rate securities (ARS). This is because cash equivalents and marketable securities are valued
primarily using quoted market prices or alternative pricing sources and models utilizing market observable
inputs, as provided to us by our brokers. ARS investments are classified within Level 3 because they are valued
using a discounted cash flow model. Some of the inputs to this model are unobservable in the market and are
significant. Our foreign currency derivative contracts are classified within Level 2 because the valuation inputs
are based on quoted prices and market observable data of similar instruments in active markets.
The recent uncertainties in the credit markets have affected all of our ARS investments and auctions for
these securities have failed to settle on their respective settlement dates. In light of these developments, to
determine the fair value for our ARS, we obtained broker reports and discussed with brokers the critical inputs
that they used in their proprietary models to assess fair value, which included liquidity, credit rating and
discounted cash flows associated with these ARS. In addition, we performed our own discounted cash flow
analysis.
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