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Table of Contents
intangible assets, affect future amortization. There are a number of generally accepted valuation methods used to estimate fair value of intangible assets, and we
use primarily a discounted cash flow method, which requires significant management judgment to forecast the future operating results and to estimate the
discount factors used in the analysis. If assumptions and estimates used to allocate the purchase price or used to access impairment prove to be inaccurate, future
asset impairment charges could be required.
Goodwill and intangible assets determined to have indefinite lives are not amortized, but are subject to an annual impairment test. To determine any goodwill
impairment, we perform a two-step process on an annual basis, or more frequently if necessary, to determine 1) whether the fair value of the relevant reporting
unit exceeds carrying value and 2) the amount of impairment loss, if any. We review our intangible assets for impairment whenever events or changes in
circumstances indicate that their carrying value may not be recoverable. Measurement of an impairment loss is based on the fair value of the asset compared to
carrying value.
We performed an annual test for impairment of goodwill and intangible assets in the fourth quarter of 2007 and determined that there was no impairment. The
assumptions used to test for impairment, including expected revenues, discount rates, and terminal values, are highly subjective. Valuation models are sensitive
to changes in assumptions, and therefore changes in these assumptions in the future could result in significant impairment charges or changes to our expected
amortization.
Stock-based compensation
Since January 1, 2006, we recognize compensation expense for all share-based payment awards. Under SFAS 123(R) we measure the fair value of awards of
equity instruments and under SFAS 123(R) recognize the cost, net of an estimated forfeiture rate, on a straight-line basis over the period during which services
are provided in exchange for the award, generally the vesting period.
Calculating the fair value of stock-based compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and
expected volatility of PMC’s stock price. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period.
Our estimates of expected volatilities are based on a weighted historical and market-based implied volatility. In order to determine the expected life of the
awards, we use historical data to estimate option exercises and employee terminations; separate groups of employees that have similar historical exercise
behavior, such as directors or executives, are considered separately for valuation purposes. The expected forfeiture rate applied in calculating stock-based
compensation cost is estimated using historical data.
The assumptions used in calculating the fair value of stock-based awards involve estimates that require management judgment. If factors change and we use
different assumptions, our stock-based compensation expense could change significantly in the future. In addition, if our actual forfeiture rate is different from
our estimate, our stock-based compensation could change significantly in the future. See Notes 1 and 4 to the Consolidated Financial Statements for further
information on stock-based compensation.
45
Source: PMC SIERRA INC, 10-K, February 22, 2008