AMD 2012 Annual Report Download - page 54

Management believes 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 Allowances. 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. 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 market 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 is not amortized, but rather is 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. The implied fair value of a
reporting unit is determined through the application of one or more valuation models common to our industry,
including the income, market and cost approaches. 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.
Based on the results of our annual analysis of goodwill in 2012 and 2011, each reporting unit’s fair values
exceeded their carrying values, indicating that there was no goodwill impairment.
For the annual goodwill impairment analysis in 2012, each reporting unit’s estimated fair value exceeded its
carrying value ranging from approximately 6% to approximately 170%. The estimated fair value of our
Computing Solutions reporting unit exceeded its carrying value by approximately 6%. Total goodwill relating to
our Computing Solutions reporting unit was $230 million as of December 29, 2012. The reasons for the small
excess of fair value over carrying value of the Computing Solutions reporting unit are primarily due to the recent
global economic downturn, the changes in our industry, specifically related to the decline in PC sales, and the
decline in our market capitalization. Estimates of fair value for all of our reporting units can be affected by a
46