AMD 2009 Annual Report Download - page 55

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 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.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of net tangible and
identifiable intangible assets acquired. Goodwill amounts are not amortized, but rather are tested for impairment
at least annually, or more frequently if there are indicators of impairment present. We perform the annual
goodwill impairment analysis as of the first day of the fourth quarter of each fiscal year. We evaluate whether
goodwill has been impaired at the reporting unit level by first determining whether the estimated fair value of the
reporting unit is less than its carrying value and, if so, by determining whether the implied fair value of goodwill
within the reporting unit is less than the carrying value. Implied fair value of goodwill is determined by
considering both the income and market approach. While market valuation data for comparable companies is
gathered and analyzed, we believe that there has not been sufficient comparability between the peer groups and
the specific reporting units to allow for the derivation of reliable indications of value using a market approach.
Therefore, we have ultimately employed the income approach which requires estimates of future operating
results and cash flows of each of the reporting units, discounted using estimated discount rates. The key
assumptions we use to determine the fair value of our reporting units includes projected cash flows for the next
10 years and discount rates ranging from 13 percent to 32 percent. Discount rates are based on our weighted
average cost of capital, adjusted for the risks associated with operations. A variance in the discount rate could
have a significant impact on the amount of the goodwill impairment charge recorded, if any.
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