AMD 2011 Annual Report Download - page 80

returns, allowances and future price reductions, based on actual historical experience and other known or anticipated
trends and factors, are recorded at the time revenue is recognized. The Company sells to distributors under terms
allowing the majority of distributors certain rights of return and price protection on unsold merchandise held by
them. The distributor agreements, which may be cancelled by either party upon specified notice, generally contain a
provision for the return of those of the Company’s products that the Company has removed from its price book or
that are not more than twelve months older than the manufacturing code date. In addition, some agreements with
distributors may contain standard stock rotation provisions permitting limited levels of product returns. Therefore
the Company is unable to estimate the product returns and pricing when the product is sold to the distributors.
Accordingly, the Company defers the gross margin resulting from the deferral of both revenue and related product
costs from sales to distributors with agreements that have the aforementioned terms until the merchandise is resold
by the distributors and reports such deferred amounts as “Deferred income on shipments to distributors” on its
consolidated balance sheet. Products are sold to distributors at standard published prices that are contained in price
books that are broadly provided to the Company’s various distributors. Distributors are then required to pay for
these products within the Company’s standard commercial terms, which are typically net 30 days. The Company
records allowances for price protection given to distributors and customer rebates in the period of distributor
re-sale. The Company determines these allowances based on specific contractual terms with its distributors. Price
reductions generally do not result in sales prices that are less than the Company’s product cost. Deferred income on
shipments to distributors is revalued at the end of each period based on the change in inventory units at distributors,
latest published prices, and latest product costs.
The Company also sells its products to distributors under sales arrangements whose terms do not allow for
rights of return or price protection on unsold products held by them. In these instances, the Company recognizes
revenue when it ships the product directly to the distributors.
The Company records estimated reductions to revenue under distributor and customer incentive programs,
including certain cooperative advertising and marketing promotions and volume based incentives and special
pricing arrangements, at the time the related revenues are recognized. For transactions where the Company
reimburses a customer for a portion of the customer’s cost to perform specific product advertising or marketing
and promotional activities, such amounts are recorded as a reduction of revenue unless they qualify for expense
recognition. Shipping and handling costs associated with product sales are included in cost of sales.
Deferred revenue and related product costs were as follows:
December 31,
2011
December 25,
2010
(In millions)
Deferred revenue .................................... $202 $ 254
Deferred cost of sales ................................. (79) (111)
Deferred income on shipments to distributors .............. $123 $ 143
Inventories. Inventories are stated at standard cost adjusted to approximate the lower of actual cost
(first-in, first-out method) or market (net realizable value). Inventories on hand in excess of forecasted demand
are not valued. Obsolete inventories are written off.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of net tangible and
identifiable intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment at least
annually or more frequently if there are indicators of impairment present. The Company performs its annual
goodwill impairment analysis as of the first day of the fourth quarter of each fiscal year. The Company evaluates
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. The implied fair value of goodwill is
determined through the application of one or more valuation models common to our industry, including the
income, market and cost approaches.
74