AMD Warns of “Material” Goodwill Charge

It seems that the microprocessor manufacturer paid too much to acquire ATI.

Advanced Micro Devices said that the value of its goodwill is impaired as a result of its October 2006 acquisition of ATI Technologies. Translation: The second largest maker of microprocessors overpaid for ATI.

The company said it is currently unable to estimate the amount of the impairment charge, but warned that it will be material. “This conclusion was reached based on the results of an updated long-term financial outlook for ATI’s businesses as part of the company’s annual strategic planning cycle,” AMD explained in a regulatory filing.

AMD bought ATI in July 2006, for about $5.6 billion. Shortly after AMD completed the acquisition, it said in a regulatory filing that goodwill accounted for $3.2 billion of the total purchase price.

Earlier this week, Unify Corp. announced that it would restate financial results based on a goodwill accounting error the company made related to its 2006 purchase of Gupta Technologies.

Goodwill has been a controversial subject with CFOs since 2001, when the Financial Accounting Standards Board voted in favor of new standards that require goodwill to be tested for impairment on an annual basis instead of amortized. One of those rules, FAS 141, Business Combinations, was updated last week, and the revisions — called FAS 141(R) — will go into effect for fiscal years beginning after December 15, 2008.

FAS 141(R) represents a major departure from the historical cost accounting that many companies use now. Indeed, some experts say that the most difficult part of complying with the rule will be coming to grips with fair value principles that are now prescribed by the rewritten rule.

In another twist on FAS 141(R) implementation, Georgia Tech professor Charles Mulford noted in a study released in October that FASB’s revision will require companies to recognize “negative” goodwill immediately. Negative goodwill is the gain created when a company buys an asset — including another corporation — for below the asset’s fair value, or current market price.

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