AMD 2010 Annual Report Download - page 54

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 have used to determine the fair value of our reporting units includes projected cash flows for the
next 10 years and discount rates ranging from 15% to 30%. 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.
Impairment of Long-Lived Assets including Acquired Intangible Assets. We consider quarterly whether
indicators of impairment of long-lived assets and intangible assets are present. These indicators may include, but
are not limited to, significant decreases in the market value of an asset and significant changes in the extent or
manner in which an asset is used. If these or other indicators are present, we test for recoverability of the asset by
determining whether the estimated undiscounted cash flows attributable to the assets in question are less than
their carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the
assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or
other methods. Significant judgment is involved in estimating future cash flows and deriving the discount rate to
apply to the estimated future cash flows, and in evaluating the results of appraisals or other valuation methods.
For example, in recent analyses performed, discount rates have ranged from 18% to 32%, but this may not be
indicative of future analyses. If the asset determined to be impaired is to be held and used, we recognize an
impairment loss through a charge to our operating results, which also reduces the carrying basis of the related
asset. The new carrying value of the related asset is depreciated or amortized over the remaining estimated useful
life of the asset. We also must make subjective judgments regarding the remaining useful life of the asset. We
may incur additional impairment losses in future periods if factors influencing our estimates of the undiscounted
cash flows change. For assets held for sale, impairment losses are measured at the lower of the carrying amount
of the assets or the fair value of the assets less costs to sell. For assets to be disposed of other than by sale,
impairment losses are measured as their carrying amount less salvage value, if any, at the time the assets cease to
be used.
Income Taxes. In determining taxable income for financial statement reporting purposes, we must make
certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax
liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary
differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.
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
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