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Analysis of Inventory
Inventory Accounting Policy
Intel computes inventory cost on a first-in, first-out basis. Intel’s process and product development life cycle corresponds with substantive engineering milestones. These engineering milestones are regularly and consistently applied in assessing the point at which Intel’s activities, and associated costs, change in nature from research and development (R&D) to cost of sales and when cost of sales can be capitalized as inventory.
For a product to be manufactured in high volumes and sold to Intel’s customers under the standard warranty, it must meet the rigorous technical quality specifications. This milestone is known as product release qualification (PRQ). Intel has identified PRQ as the point at which the costs incurred to manufacture the products are included in the valuation of inventory. Prior to PRQ, costs that do not meet the criteria for R&D are included in cost of sales in the period incurred. If the point at which Intel estimates that inventory meets PRQ criteria changes in the future, the timing and recognition of costs would shift between inventory, and R&D and costs of sales. A single PRQ has previously ranged up to $770 million and is dependent on product type.
The valuation of inventory includes determining which fixed production overhead costs can be included in inventory based on the normal capacity of Intel’s manufacturing and assembly and test facilities. Intel applies the historical loadings compared to the total available capacity in a statistical model to determine the normal capacity level. If the factory loadings are below the established normal capacity level, a portion of Intel’s fixed production overhead costs would not be included in the cost of inventory; instead, it would be recognized as cost of sales in that period. Intel refers to these costs as excess capacity charges. Excess capacity charges are insignificant in the years presented, charges in certain prior years have ranged from $46 million to $1.1 billion. The high end of the range would be $540 million when excluding the $1.1 billion charge taken in connection with the 2009 economic recession.
Inventory is valued at the lower of cost or net realizable value, based upon assumptions about future demand and market conditions. Product-specific facts and circumstances reviewed in the inventory valuation process include a review of Intel’s customer base, the stage of the product life cycle, and an assessment of selling price in relation to product cost. Inventory reserves increased by approximately $185 million in 2017 compared to 2016.
The valuation of inventory also requires Intel to estimate obsolete and excess inventory, as well as inventory that is not of saleable quality. Intel uses the demand forecast to develop the short-term manufacturing plans to enable consistency between inventory valuations and build decisions. Intel compares the estimate of future demand to work in process and finished goods inventory levels to determine the amount, if any, of obsolete or excess inventory. If Intel’s demand forecast for specific products is greater than actual demand and Intel fails to reduce manufacturing output accordingly, Intel could be required to write off inventory.
Source: 10-K (filing date: 2018-02-16).
Intel Corp., Statement of Financial Position, Inventory
USD $ in millions
|Dec 30, 2017||Dec 31, 2016||Dec 26, 2015||Dec 27, 2014||Dec 28, 2013|
|Work in process|
|Inventories||Amount after valuation and LIFO reserves of inventory expected to be sold, or consumed within one year or operating cycle, if longer.||Intel Corp.’s inventories increased from 2015 to 2016 and from 2016 to 2017.|