Case 4.3 - Depreciation in the Semiconductor Industry 1. Evaluate the disclosures in the notes that accompany the financial statements of these six firms. Which are the most informative? The least informative? Why? 2. Are the machinery and equipment useful life disclosures by these six firms informative enough for an analyst to determine whether the useful lives are reasonable relative to each other? Explain. 3. Using the information in the case, or any other information, estimate the average age of machinery and equipment at these six firms. 4. How much flexibility do these firms have in the amount of depreciation they allocate to inventory? Suppose Intel sold and produced 40% less than planned at the beginning of a year. How would that influence the depreciation allocated to inventory and the depreciation that Intel reported as an expense on its income statement? Suppose Intel sold 40% less than planned at the beginning of a year but produced what the amount it planned. How would that influence the depreciation allocated to inventory and the depreciation that Intel reported as an expense on its income statement? 5. Should the firms, in this case, consider depreciation costs when they set prices? Explain. 6. Compare the four firms using the information in Exhibit 1.

270 SECTION FOUR FINANCIAL REPORTING-IFRS EXHIBIT 1 SELECTED FINANCIAL INFORMATION (MILLIONS OF SU.S., EUROS, OR NT$) Years ending December 31, except Infineon (years end September 30): For periods shown, approximately .65 to .85 Euros = 1 $ U.S. and 35 NT$ = 1 $ U.S. 2008 2007 2006 2005 2004 STMicroelectronics NV Net sales $9,842 $10,001 $9,854 $8,882 $8,760 Cost of sales $6,282 $6,465 $6,331 $5,845 $5,532 Research & development $2,152 $1,802 $1,667 $1,630 $1,532 Net income after tax $(7,486) $(477) $782 $266 $601 Property, plant, & equipment $18,775 $19,181 $19,951 $17,312 $17,981 Accum depreciation $(14,036) $(14,137) $(13,525) $(11,137) $(10,539) Property, plant, & equipment (net) $4,739 $5,044 $6,426 $6,175 $7,442 Investments, PP&E* $983 $1,140 $1,533 $1,441 $2,050 Depreciation* * $1,366 $1,413 $1,766 $1,944 $1,837 Infineon Technologies AG* * * * Net sales $4,321 E4,074 (4,114 67,929 $5,843 Cost of sales E2,823 E2,702 E2,805 E4,909 E4,670 Research & development (755 E768 (816 (1,293 (1,219 Net income after tax* * * E (3,122) E (368) E(268) E(312) 61 Property, plant, & equipment E6,964 E12,908 613,254 E11,461 (10,763 Accum depreciation E(5,653) E(9,261) E(9,490) E(7,710) E(7,176) Property, plant, & equipment (net) (1,311 (3,647 E3,764 63,751 63,587 Investments, PP&E* E312 E498 (1,253 (1,368 E1, 163 Depreciation* * 6542 :609 E1,405 E1,316 (1,320 Taiwan Semiconductor Manufacturing Company (TSMC)-amounts in NT$ Net sales $333,158 $322,631 $317,407 $266,565 $257,213 Cost of sales $191,408 180,280 $161,597 $158,362 $14,139 Research & development $21,481 $17,946 $16,076 $14,016 $12,516 Net income after tax $100,523 $109,932 $127,195 $93,633 $92,329 Property, plant, & equipment $862,462 $800,352 $717,132 $642,948 $590,165 Accum depreciation (not avail) $(618,816) $(540,100) $(463,038) $(398,125) $(331,254) Property, plant, & equipment (net) $243,645 $260,252 $245,094 $244,823 $258,911 Investments, PP&E* $59,223 $84,001 $78,737 $79,879 $81,095 Depreciation* * $81,512 $80,005 $73,715 $75,649 $69,819 (continued)