Intel 2006 Annual Report Download - page 41

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Long
-Lived Assets
We assess long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of the
assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment
review include significant under-performance of a business or product line in relation to expectations, significant negative
industry or economic trends, and significant changes or planned changes in our use of the assets. Recoverability of assets that
will continue to be used in our operations is measured by comparing the carrying amount of the asset grouping to our estimate
of the related total future undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through the
related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is measured by the
difference between the asset grouping’s carrying amount and its fair value.
Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent
cash flows. Due to our asset usage model and the interchangeable nature of our semiconductor manufacturing capacity, we
must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings. In
addition, as we make manufacturing process conversions and other factory planning decisions, we must make subjective
judgments regarding the remaining useful lives of assets, primarily process
-specific semiconductor manufacturing tools and
building improvements. When we determine that the useful lives of assets are shorter than we had originally estimated, and
there are sufficient cash flows to support the carrying value of the assets, we accelerate the rate of depreciation charges in
order to fully depreciate the assets over their new shorter useful lives. Impairments and accelerated depreciation of long-lived
assets were approximately $335 million during 2006 (approximately $20 million in 2005 and $50 million in 2004). The
amount in 2006 included $317 million of asset impairment charges related to our communications and application processor
business. For further discussion on these asset impairment charges, see “Note 11: Restructuring and Asset Impairment
Charges” in Part II, Item 8 of this Form 10-K.
Inventory
The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable
quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. During
the second quarter of 2006, we completed a demand forecast accuracy analysis. As a result, the demand horizon now includes
additional weeks of the demand forecast period for certain products, compared to prior years, and continues to include a
review of product-specific facts and circumstances. This change did not have a significant impact on gross margin in 2006.
The demand forecast is also a direct input in the development of our short-term manufacturing plans, to help enable
consistency between inventory valuation and build decisions. Product-specific facts and circumstances reviewed in the
inventory valuation process include a review of the customer base, the stage of the product life cycle of our products,
consumer confidence, and customer acceptance of our products as well as an assessment of the selling price in relation to the
product cost. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing
output accordingly, or if we fail to accurately forecast the demand, we could be required to write down additional inventory,
which would have a negative impact on our gross margin.
Share
-Based Compensation
In the first quarter of 2006, we adopted SFAS No. 123(R), which requires the measurement at fair value and recognition of
compensation expense for all share-based payment awards. Total share-based compensation during 2006 was $1.4 billion.
Determining the appropriate fair-value model and calculating the fair value of employee stock options and rights to purchase
shares under stock purchase plans at the date of grant requires judgment. We use the Black-Scholes option pricing model to
estimate the fair value of these share-
based awards consistent with the provisions of SFAS No. 123(R). Option pricing models,
including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life,
expected dividend rate, and expected risk-free rate of return. The assumptions for expected volatility and expected life are the
two assumptions that significantly affect the grant date fair value. The expected dividend rate and expected risk-free rate of
return are not significant to the calculation of fair value.
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