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directors,'and'business'partners,'ensuring'consistent'and'uncompromising'integrity.''Further,' Intel'is'dedicated'to'caring'for'people'and'natural'resources'by'designing'safe,'energy`efficient' products'that'minimize'impact'to'the'environment.''To'this'end,'Intel'has'documented'policies' on'Environmental,'Health,'and'Safety;'Climate'Change;'and'Water'use.''Finally,'Intel'is' committed'to'ethical'and'legal'business,'environmental,'human'rights,'and'labor'practices'on'a' worldwide'basis'with'annual'report'statements'related'to'support'for'Human'Rights,'their' stance'against'Human'Trafficking'&'Slavery'and'policy'on'Conflict'Minerals26.''While'most' company'annual'reports'contain'this'type'of'altruistic'language,'a'review'of'Intel'news'releases' for'the'last'year'suggests'Intel's'actions'are'consistent'with'their'commitments.' Accounting!Analysis! ' The'purpose'of'this'section'is'to'evaluate'the'degree'to'which'Intel's'accounting' captures'its'true'business'practices.''Specifically,'this'section'will'examine'places'where'Intel' has'accounting'flexibility.''Additionally,'this'section'will'evaluate'the'appropriateness'of'Intel's' accounting'policies'and'estimating'techniques.''Together,'these'provide'an'indication'of'the' credibility'behind'Intel's'numbers.' Policies+ Intel's'annual'report'outlines'all'of'its'accounting'policies27'which'include'specific' ' policies'on'Use'of'Estimates,'Fair'Value,'Fair'Value'Hierarchy,'Cash'Equivalents,'Trading'Assets,' Available`for`Sale'Investments,'Non`Marketable'and'Other'Equity'Investments,'Other`Than` Temporary'Impairment,'Derivative'Financial'Instruments,'Measurement'of'Effectiveness,' ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 26 'www.intel.com/go/governance' 27 'www.intc.com/intel`annual`report/2013/10K/57`accounting`policies.html' ' 16' Securities'Lending,'Loans'Receivable,'Inventories,'Property,'Plant'and'Equipment,'Goodwill,' Identified'Intangible'Assets,'Product'Warranty,'Revenue'Recognition,'Advertising,'Employee' Equity'Incentive'Plans,'and'Income'Taxes.''Most'of'these'contain''boilerplate''language'that'is' similar'to'the'policies'stated'in'Texas'Instruments'(TXN)'and'Advanced'Micro'Devices'(AMD)' annual'reports.''The'following'paragraphs'highlight'some'of'the'most'notable'policies'as'they' relate'to'the'credibility'of'Intel'financial'statements.' ' Use'of'Estimates'`'Intel'makes'extensive'use'of'estimates'throughout'its'financial' statements.''These'include'subjective'judgments'on'the'valuation'of'non`marketable'equity' investments,'assessments'on'the'recoverability'of'long`lived'assets,'recognition'and' measurement'of'current'and'deferred'income'taxes,'valuation'of'inventory,'and'recognition'&' measurement'of'loss'contingencies.''While'TXN'and'AMD'make'similar'statements,'these'areas' where'estimates'are'used'warrant'further'investigation'when'examining'the'statements.' ' Fair'Value'`'Fair'value'is'the'price'that'would'be'received'from'selling'an'asset'or'paid'to' transfer'a'liability'in'an'orderly'transaction'between'market'participants'at'the'measurement' date28.''When'determining'fair'value,'Intel'considers'the'principal'or'most'advantageous' market'in'which'they'would'transact.''The'TXN'and'AMD'reports'contain'nebulous'statements' about'fair'value.''Intel,'at'least'states'they'use'an'optimistic,'but'perhaps'not'realistic,' estimation'methodology.' ' Inventories'`'Intel'computes'inventory'cost'on'a'first`in,'first`out'basis,'which'is' consistent'with'TXN'and'AMD.''This'industry'first`in,'first`out'inventory'policy'makes'sense' given'the'short'life'of'semiconductor'products.''However,'this'first`in,'first`out'process'suggests' ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 28 'www.intc.com/intel`annual`report/2013/10K/57`accounting`policies.html' ' 17' eventually'one'of'these'firms'winds'up'having'some'obsolete'inventory'that'will'have'to'written' off.' ' Goodwill'`'Goodwill'represents'the'excess'of'the'purchase'price'over'the'fair'value'of' net'tangible'and'identifiable'intangible'assets'acquired.''Neither'Intel,'TXN'nor'AMD'amortize' goodwill,'but'test'periodically'for'impairment.''They'all'evaluate'whether'goodwill'has'been' impaired'by'determining'if'the'estimated'fair'value'of'the'acquisition'is'less'than'the'carrying' value.''The'implied'fair'value'is'determined'through'the'use'of'industry'valuation'models.''Any' differences'are'expensed.''This'topic'will'be'discussed'further'under'Long`Lived'Assets.' ' Revenue'Recognition'`'Intel's'revenue'recognition'is'quite'complex'due'to'its'different' business'segments'and'its'variety'of'end`users.''For'example,'Intel'recognizes'revenue'from' products'sold'directly'to'end`consumers'when'delivery'has'occurred.''For'sales'made'to' distributors,'Intel'defers'product'revenue'and'related'costs'of'sales'until'the'distributors'sell' the'merchandise.''This'is'done'primarily'to'give'the'distributor'price'protection'because'of' frequent'sales'price'reductions'and'rapid'technology'obsolescence'in'the'industry.''Intel'also' receives'revenue'from'license'agreements'primarily'with'the'McAfee'segment.''Revenue'from' these'agreements'is'deferred'and'recognized'over'the'performance'of'the'agreement'period.'' Similarly,'revenue'Intel'derives'from'online'subscription'products'is'deferred'and'recognized' over'the'subscription'periods.''For'Intel'professional'services,'revenue'is'recognized'as'services' are'performed.''To'make'revenue'recognition'even'more'complicated,'Intel'has'numerous' relationships'where'all'of'these'elements'are'being'provided'to'a'single'customer.''In'these' cases,'revenue'is'allocated'across'the'separately'identified'deliverables'and'may'be'recognized' or'deferred.''Costs'associated'with'all'of'these'revenue'generating'activities'are'deferred'and' ' 18' amortized'over'the'same'period'that'the'related'revenue'is'recognized29.''While'revenue' recognition'is'not'directly'comparable'for'TXN'and'AMD,'for'basic'components'they'use'similar' revenue'recognition'policies.''Revenue'Recognition'is'an'area'of'accounting'flexibility'that'will' be'discussed'further'in'the'paragraphs'below.' Flexibility+ ' In'the'Management's'Discussion'&'Analysis'section'of'the'annual'report,'Intel'is'very' forthcoming'about'the'extensive'use'of'subjective'estimates'in'their'financial'reporting30.''The' key'areas'include'the'valuation'of'non`marketable'equity'investments,'assessment'on' recoverability'of'long`lived'assets,'recognition'and'measurement'of'current'and'deferred' income'taxes,'the'valuation'of'inventory'and'recognition'and'measurement'of'loss' contingencies.''The'gist'of'these'estimates'are'to'identify'the'fair'value'of'an'asset.''The' estimate'methodologies'provide'ample'accounting'flexibility'for'Intel'and'are'covered'in'more' detail'in'the'following'paragraphs.' ' Non`Marketable'Equity'Investments'`'Intel'invests'in'non`marketable'equity' instruments'of'private'companies'ranging'from'start`ups'to'mature'companies'with'established' revenue'streams'and'business'models.''At'the'end'of'December'2013,'the'value'of'these'types' of'investments'was'valued'at'$2.3'billion.''Since'these'equity'stakes'are'non`marketable,'Intel' has'to'estimate'their'value.''Intel'uses'two'estimating'approaches.''The'first'is'based'on'using' financial'metrics,'such'as'projected'revenue,'projected'earnings,'and'financial'ratios'of' comparable'public'companies.''The'selection'of'companies'for'comparison'is'an'art'since'the' ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 29 'www.intc.com/intel`annual`report/2013/10K/57`accounting`policies.html' 30 'www.intc.com/intel`annual`report/2013/10K/28`critical`accounting`estimates.html' ' 19' start`up'often'has'a'unique'product'and'service.''Generally,'however,'it'is'based'on'factors' including'company'size,'growth'rate,'industry,'and'development'stage.''For'more'mature' companies,'Intel'uses'a'discounted'cash'flow'model,'which'requires'significant'estimates' regarding'the'company's'revenue,'costs,'and'discount'rates'based'on'the'risk'profile'of' comparable'companies.''Estimates'of'revenue'and'costs'are'developed'using'available'market,' historical,'and'forecasted'data.''If'Intel'determines'the'fair'value'of'an'investment'is'below'the' carrying'value,'Intel'writes'down'the'investment'to'its'fair'value.''It'is'interesting'to'note'that' these'impairments'of'non`marketable'equity'investments'were'$112'million'in'2013,'$104' million'in'2012'and'$63'million'in'2011.''Assuming'the'estimates'are'correct,'Intel's'losses'on' these'types'of'investments'has'doubled'over'the'2'year'period,'although'the'$112'million'only' represents'about'5%'of'the'entire'$2.3'billion'portfolio.' ' Long`Lived'Assets'`'Property,'Plant,'Equipment,'Goodwill'and'other'Identified' Intangibles'all'follow'an'estimating'approach'similar'to'Non`Marketable'Equity'Investments.'' Specifically,'Intel'tries'to'find'comparables'based'on'groupings'of'like'assets.''If'the'assets'are' directly'producing'a'revenue'stream,'then'a'cash'flow'model'is'used.''However,'even'when'a' cash'flow'model'is'used,'considerable'subjective'judgments'regarding'the'remaining'useful'lives' of'assets'have'to'be'made.''In'general,'the'assumptions'and'estimates'used'to'determine'future' values'and'remaining'useful'lives'of'Intel's'long`lived'assets'are'complex,'subjective'and' influenced'by'numerous'external'factors'such'as'industry'and'economic'trends.''Overall,'these' impairments'are'small'relative'to'the'size'of'Intel.''In'2013,'impairment'charges'were'$17' ' 20' million'($21'million'in'2012'and'$10'million'in'2011).''It'should'be'noted,'however,'these'values' are'small'only'if'you'assume'the'estimates'are'correct31.' ' Income'Taxes'`'Intel'makes'various'estimates'and'judgments'in'determining'the' provision'for'taxes'related'to'calculation'of'tax'credits,'benefits,'and'deductions.''Further' judgments'are'required'in'the'calculation'of'certain'tax'assets'and'liabilities'that'arise'from' differences'in'the'revenue'and'expense'recognition'timing.''Changes'in'the'assumptions'behind' these'estimates'may'result'in'an'increase'or'decrease'to'Intel's'tax'provisions.''These'tax' related'assumptions'also'provide'another'accounting'flexibility'knob.' ' Inventory'`'Semiconductor`based'products'can'be'considered'end`products'at'various' stages'of'development.''Intel'has'to'decide'at'what'point'product'costs'change'from'R&D' expenditures,'which'would'be'expensed'in'the'current'period,'to'cost'of'sales,'which'could'be' deferred.''This'point'may'be'different'for'different'customers'providing'Intel'some'flexibility' regarding'how'to'expense'costs.''Intel's'inventory'valuation'is'another'area'providing' accounting'flexibility.''Their'inventory'is'valued'at'the'lower'of'cost'or'market'based'upon' assumptions'concerning'future'demand'and'market'conditions.''Some'of'the'factors'considered' are:'customer'base,'stage'of'the'product'life'cycle,'consumer'confidence,'customer'acceptance' and'an'assessment'of'selling'price'in'relation'to'product'cost.''If'the'estimated'value'of'the' inventory'is'less'than'the'carrying'value,'Intel'writes'down'the'inventory'and'records'the' difference'as'a'charge'to'cost'of'sales.''A'final'aspect'on'inventory'concerns'obsolete'inventory.'' Intel's'valuation'of'inventory'requires'an'estimation'of'obsolete'inventory.''To'do'this,'a' demand'forecast'is'utilized.''This'is'then'compared'to'inventory'levels.''If'the'demand'forecast' ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 31 'www.intc.com/intel`annual`report/2013/10K/28`critical`accounting`estimates.html' ' 21' for'specific'products'is'less'than'inventory'levels,'the'excess'products'are'written'off.''These' estimation'models'are'highly'sensitive'to'assumptions,'giving'Intel'plenty'of'accounting' flexibility'by'designating''obsolete''inventory.' ' Loss'Contingencies'`'This'final'area'also'gives'Intel'considerable'accounting'flexibility.''As' a'leader'in'the'industry,'Intel'is'constantly'subjected'to'various'legal'and'administrative' proceedings'with'potential'financial'claims.''Further,'there'is'always'the'potential'that'product' issues'will'occur'while'they'are'still'under'warranty.''Based'on'these'potential'claims,'Intel' estimates'a'loss'recognized'as'a'charge'to'income,'even'if'the'loss'has'not'occurred'(and'may' not'occur).''This'is'similar'to'making'an'allowance'for'uncollected'accounts.''The'amount'set` aside'for'loss'contingencies'is'highly'subjective'and'is'definitely'another''tool''Intel'could'use'to' smooth'earnings.' Strategy+ ' As'demonstrated'above,'Intel'has'significant'accounting'flexibility.''The'question,' however,'is'whether'or'not'they'are'using'this'flexibility'to'accurately'communicate'Intel's' economic'situation'or'using'it'to'hide'something.''By'comparing'Intel's'policies'to'others'in'the' industry,'we'can'get'a'first'look'at'potential'irregularities.''As'noted'in'the'Policies'section,' Intel's'accounting'policies'are'in'alignment'with'other'companies'in'the'semiconductor'industry' such'as'TXN'and'AMD.' ' Managers'could'also'be'tempted'to'use'this'flexibility'to'manage'earnings.''Intel' managers,'however,'would'not'be'doing'this'to'avoid'triggering'debt'covenants,'since'Intel'has' more'than'enough'cash'to'pay'off'their'long`term'debt.''One'possibility,'however,'is' accounting`based'compensation.''Over'the'last'3`years,'the'top'7'executives'at'Intel'had' ' 22' compensation'of'$187'million.''Most'of'this'was'in'the'form'of'stock'and'stock'options'($130' million)32.''Clearly,'there'is'motive'for'these'managers'to'keep'the'stock'climbing.''Another' motive'for'Intel's'accounting'practices'is'to'minimize'the'tax'burden.''Intel'is'pretty'open'about' this,'stating'that'profits'made'in'another'country'will'stay'there'for'reinvestment'purposes' versus'bring'the'profits'back'to'the'U.S.'where'they'would'be'taxed.' There'were'several'accounting'changes'in'2011'and'201233.''In'2011,'Intel'adopted'a' ' policy'concerning'revenue'recognition'related'to'multiple'deliverables.''This'change'simply' allowed'Intel'to'modify'the'method'by'which'revenue'is'allocated'to'the'separately'identified' deliverables'(recurring'software'subscription'versus'a'one'time'hardware'purchase'by'the'same' customer).''According'to'Intel,'this'change'had'no'material'impact.''There'were'two'other' changes,'one'in'2011'and'one'in'2012,'that'had'no'material'impact,'but'paved'the'way'for'more' accounting'flexibility.''Specifically,'the'changes'allow'Intel'to'assess'qualitative'factors'in' determining'whether'the'fair'value'of'an'asset's'goodwill'and'long`lived'assets'are'going'to'be' less'than'its'carrying'value.''These'qualitative'factors'add'to'the'subjectivity'in'assessing'the'fair' value'of'these'items.' ' Overall,'the'accounting'strategy'used'by'Intel'seems'to'accurately'represent'the' company's'financial'activity'and'health.''Their'policies'and'estimates'seem'realistic'and'no' business'transactions'seem'out'of'place.''While'it'still'remains'true'that'Intel'has'significant' accounting'flexibility,'Intel'uses'a'conservative'approach'in'alignment'with'industry'norms.'' Finally,'the'auditor'(Ernest'&'Young)'has'this'to'say,'"...the'financial'statements'referred'to' ''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 32 'www.intc.com/IntelProxy2014/58`execitive`compensation.html' 33 'www.intc.com/intel`annual`report/2013/10K/58`accounting`changes.html' ' 23' above'present'fairly,'in'all'material'respects,'the'consolidated'financial'position'of'Intel' Corporation'at'December'28,'2013'and'December'29,'2012".''Additionally,'they'state,'"Intel' Corporation'maintained,'in'all'material'respects,'effective'internal'control'over'financial' reporting'as'of'December'28,'2013".' Disclosure+Quality+ ' Annual'reports'can'be'over'a'100'pages.''The'latest'from'Intel'is'140'pages.''Within' those'pages,'companies'have'a'choice'on'making'it'more'or'less'easy'for'someone'to'assess'the' company's'accounting'quality'and'use'the'statements'to'understand'the'business'reality'of'the' firm.''Overall,'Intel'appears'to'make'an'attempt'to'be'as'transparent'as'possible'with'their' financial'reporting.''While'some'aspects'of'the'accounting'procedures'are'subjective'and' accounting'changes'made'in'2011'and'2012'increase'this'qualitative'approach,'this'seems'to' have'been'done'to'increase'the'level'of'fidelity'into'specific'elements'of'revenue'streams' versus'just'aggregating'them'in'one'number'that'is'reported.' ' The'Executive'Letters'accompanying'Intel's'annual'report'are'primarily'cheerleading'and' motivational'speech.''However,'the'Management's'Discussion'and'Analysis'of'Financial' Condition'and'Results'(MD&A)'section'is'comprehensive'and'detailed.''The'MD&A'does'an' excellent'job'of'laying'out'the'industry'conditions,'Intel's'competitive'position'and'Intel's'plans' for'the'future.' ' Early'in'the'MD&A'section,'Intel'lays'out'the'Critical'Accounting'Estimates.''While'this'is' also'true'for'TXN'and'AMD,'Intel'provides'more'than'GAAP'"requires'us'to'make'estimates'and' judgments".''Intel'characterizes'the'main'areas'where'estimates'and'judgments'are'involved' and'then'provides'detailed'information'on'each'of'these'areas.''Further,'Intel'makes'use'of'the' ' 24' footnotes'to'explain'the'accounting'policies'and'assumptions'for'the'way'the'data'are' presented.''Intel'also'does'a'good'job'of'explaining'the'rationale'behind'various'accounting' changes'and'their'impact'on'the'presentation'of'financial'results.' ' Intel'has'grown'beyond'just'being'a'semiconductor'chip'maker.''The'company'also' provides'mobile'components'such'as'WiFi'products,'radio'frequency'transceivers,'Bluetooth' products,'power'management'chips'and'global'navigation'satellite'system'components.''In' addition,'through'various'company'acquisitions,'Intel'now'offers'network'and'content'security' as'well'as'security'software'products'for'consumer,'mobile,'and'corporate'environments.''Each' of'these'segments'has'different'accounting'practices.''Intel'provides'excellent'discussion'and' breaks'down'the'overall'top`line,'providing'insight'into'the'health'of'each'of'its'business' segments.' ' Finally,'Intel'has'an'extensive'Investor'Relations'site.''It'contains'the'latest'Intel' corporate'events,'news'releases'and'financial'statements.''Further,'it'contains'an'archive'of' past'news'and'financial'releases.''It'is'also'the'location'where'Intel'posts'the'latest'quarterly' financial'releases.''Overall,'Intel'has'a'high'quality'of'disclosure'and'does'a'great'job'of' explaining'their'assumptions,'accounting'policies'behind'the'numbers'throughout'their' financial'statements;'and'then'making'this'information'available.' Red+Flags+ ' As'just'noted,'the'Intel'Financial'Statements'provide'a'very'high'level'of'disclosure' quality.''Based'on'this,'there'are'few'areas'where'the'accounting'should'be'called'into' question.''Specifically,'there'were'no'unexplained'increases'in'contingencies'or'significant'off` ' 25' balance`sheet'arrangements.''Further,'the'only'changes'in'accounting'were'to'increase'the' financial'transparency'related'to'revenue'streams'in'different'business'segments.' ' Before'discounting'any'potential'Red'Flags,'a'couple'of'quantitative'checks'can'be' performed.''The'following'table'shows'a'comparison'of'2009'to'2013'for:'accounts'receivable'in' relation'to'sales'increases,'inventories'in'relation'to'sales'increases,'reported'income'and'cash' flow'from'operating'activities'and'reported'income'and'taxable'income.' Accoutning Analysis Indicators Receivables to Sales Inventories to Sales Net Income to Cash Flow Net Income to Pre-Taxable Income ' 2009 2010 2011 2012 6.47% 8.36% 31.9% 76.6% 6.57% 8.61% 55.6% 71.4% 6.82% 7.59% 53.9% 72.8% 7.57% 8.87% 49.7% 74.0% 2013 6.99% 7.92% 46.8% 76.3% ' The'first'indicator,'Receivables'to'Sales,'can'provide'insight'on'if'the'company'is'relaxing' its'credit'policies'or'artificially'loading'up'its'distribution'channels.''The'above'numbers'for'Intel' don't'suggest'this'happening.''The'second'indicator,'Inventories'to'Sales,'could'be'an'indicator' that'demand'for'products'are'slowing.''Again,'the'above'numbers'don't'suggest'this'is'the'case.'' The'third'indicator,'Net'Income'to'Cash'Flow,'could'indicate'changes'in'the'firm's'accrual' estimates.''It'is'assumed'that'the'2009'number'is'due'to'the'recession;'otherwise'the'numbers' are'fairly'consistent'year`over`year.''Finally,'Net'Income'to'Pre`Tax'Income'increases'could' indicate'that'financial'reporting'to'shareholders'has'become'more'aggressive.''All'of'these' qualitative'and'quantitative'measures'provide'no'warning'of'Red'Flags'on'Intel's'Financial' Statements.' Distortions+ ' The'purpose'of'this'section'was'to'evaluate'the'degree'to'which'Intel's'accounting' captures'its'true'business'practices'and'to'provide'an'indication'of'the'credibility'behind'Intel's' ' 26