Intel 2005 Annual Report Download - page 34

Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Critical Accounting Estimates
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial
statements, which we discuss under the heading “Results of Operations”
following this section of our MD&A. Some of our accounting policies require
us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical
accounting estimates include the valuation of non-marketable equity securities, which impacts net gains (losses) on equity securities when we record
impairments; recognition and measurement of current and deferred income tax assets and liabilities, which impact our tax provision; assessment of
recoverability of long-lived assets, which primarily impacts gross margin when we impair manufacturing assets or accelerate their depreciation; and
valuation of inventory, which impacts gross margin. Below, we discuss these policies further, as well as the estimates and judgments involved. We
also have other policies that we consider key accounting policies, such as policies for revenue recognition, including the deferral of revenue on sales to
distributors; however, these policies typically do not require us to make estimates or judgments that are difficult or subjective.
Non
-Marketable Equity Securities
We typically invest in non-marketable equity securities of private companies, which range from early-
stage companies that are often still defining their
strategic direction to more mature companies whose products or technologies may directly support an Intel product or initiative. At December 31,
2005, the carrying value of our portfolio of strategic investments in non-marketable equity securities, excluding equity derivatives, totaled
$561 million ($507 million at December 25, 2004).
Investments in non-marketable equity securities are inherently risky, and a number of these companies are likely to fail. Their success (or lack thereof)
is dependent on product development, market acceptance, operational efficiency and other key business success factors. In addition, depending on their
future prospects, they may not be able to raise additional funds when needed or they may receive lower valuations, with less favorable investment
terms than in previous financings, and the investments would likely become impaired.
We review our investments quarterly for indicators of impairment; however, for non-marketable equity securities, the impairment analysis requires
significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The
indicators that we use to identify those events or circumstances include (a) the investee’s revenue and earnings trends relative to predefined milestones
and overall business prospects, (b) the technological feasibility of the investee’s products and technologies, (c) the general market conditions in the
investee’s industry or geographic area, including adverse regulatory or economic changes, (d) factors related to the investee’s ability to remain in
business, such as the investee’s liquidity, debt ratios and the rate at which the investee is using its cash, and (e) the investee’s receipt of additional
funding at a lower valuation.
Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily
impaired, in which case we write the investment down to its impaired value. When an investee is not considered viable from a financial or
technological point of view, we write down the entire investment since we consider the estimated fair market value to be nominal. If an investee
obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation and the new
funding does not appear imminent, we presume that the investment is other than temporarily impaired, unless specific facts and circumstances indicate
otherwise. Impairments of investments in our portfolio of non-marketable equity securities were approximately $103 million in 2005 ($115 million in
2004 and $319 million in 2003).
Income Taxes
We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments
occur in the calculation of tax credits, tax benefits, and deductions such as the tax benefit for export sales and in the calculation of certain tax assets
and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant
changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes
by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that a substantial
majority of the deferred tax assets recorded on our balance sheet will ultimately be recovered. However, should there be a change in our ability to
recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery was not likely.
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