Adaptec 2010 Annual Report Download - page 43

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Contingent consideration
The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of Wintegra at the
estimated fair value of $28.2 million as of December 26, 2010, which reflects the fair value of an earn-out payment that the equity
holders of Wintegra may be entitled to if 2011 revenues exceed an agreed threshold. The fair value of the liability for contingent
consideration arrangement of $28.2 million was estimated by applying the income approach. The measure is based on significant
inputs that are unobservable in the market, which is a Level 3 input. Key assumptions include a discount rate of 4.75 percent and
probability-adjusted level of quarterly revenues. The Company will perform quarterly revaluations of the liability for contingent
liability and record the change as a component of operating income.
O
FF
-B
ALANCE
S
HEET
A
RRANGEMENTS
As of December 26, 2010, we had no material off-balance sheet financing arrangements.
R
ECENT
A
CCOUNTING
P
RONOUNCEMENTS
Business Combinations
In December 2007, the FASB issued ASC Topic 805, the Business Combinations Topic. ASC Topic 805 changes the accounting
for acquisitions that close beginning in 2009. More transactions and events qualify as business combinations and are accounted for at
fair value under the new standard. ASC Topic 805 promotes greater use of fair values in financial reporting. Some of the changes
introduce more volatility into earnings. ASC Topic 805 is effective for fiscal years beginning on or after December 15, 2008. The
Company applied this standard for business combinations that occurred after January 1, 2009. Business combinations that were
completed in 2010 were accounted for in accordance with this new standard, as a result, there was a material impact on the treatment
of acquisition-related costs, accounting related to a step-acquisition, and contingent consideration (see Item 8. Financial Statements
and Supplementary Data, Notes to Consolidated Financial Statements, Note 2. Business Combinations).
C
RITICAL
A
CCOUNTING
P
OLICIES
AND
E
STIMATES
General
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and assumptions that affect the amounts we report as assets,
liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Management bases its estimates on
historical experience and on various other assumptions that are reasonable in the circumstances. These estimates could change under
different assumptions or conditions.
Our significant accounting policies are outlined in the notes to the consolidated financial statements. In management’s opinion
the following critical accounting policies require the most significant judgment and involve complex estimation. We also have other
policies that we consider to be key accounting policies, such as our policies of revenue recognition, including the deferral of revenues
on sales to major distributors; however these policies do not meet the definition of critical accounting estimates as they do not
generally require us to make estimates or judgments that are difficult or subjective.
Valuation of Goodwill and Intangible Assets
We assess the impairment of long-lived assets in the fourth quarter, or when events or changes in circumstances indicate that the
carrying value of the assets or the asset grouping may not be recoverable. Factors
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