Sashi Velnati, ID: 000727010 Publicly Traded Company Assignment, Paper # 2

(Chapter 5)

Intel Corporation’s internal controls over financial reporting and preparation of financial

statements seem to comply with GAAP principles. Based on the statements including in the 10-

K document, the internal controls pertaining to financial reporting appear to include the accurate

maintenance of records in detail that record the transactions of the company and the company

has provided all the assurances that the management hierarchy of the company is fully aware of

all the transactions required to prepare the financial statements. The document further attests

that there are checks in place at Intel to detect any wrong doing that can affect the financial

statements.

Intel Management acknowledges the responsibility and the importance of establishing and

enforcing internal controls of financial reporting in compliance with the regulations

The 10-K document specifies that Intel Management did an assessment for the FY 2013

regarding all the key elements of internal controls, including the documentation and the policies.

The conclusion of this assessment based on the document states the internal controls provide

reasonable assurance that the GAAP principles were adhered to. Intel has two levels of

validation of this assessment: an internal audit committee of Intel’s board of directors and an

external independent accounting firm, Ernst & Young. The additional internal layer appears to

be a cautious approach to ensure the accuracy of the financial statements.

The assessment of the external independent registered public accounting firm, Ernst & Young,

is included in the 10-k and they endorse the above conclusion regarding the internal controls

reached by Intel’s management.

From 10-K states that Intel did not make any changes to the internal control over financial

reporting compared to the previous period which affects the financial reporting.

Intel’s management through the 10-K document clearly states that the controls may not be

adequate to detect all errors and fraud. Given the complex control space like financial

accounting, it would be very challenging to design a perfect control system. However, it does

appear that Intel could do more to improve the internal controls based on the cost benefit

rationale given in the document. There is also an added challenge of some inherent

assumptions needed to design the control system and unknowns based on future events. It may

be a standard practice for all companies to declare the risks of a misstatements to cover

themselves, but it would be interesting to look at the cost benefit analysis to asses which

processes/procedures were not implemented by Intel because of the cost associated with them.

Financial reporting processes appear to be very dependent on people and labor/resource

intensive controls which may not be adequately defined. There is a very specific statement in

the document referring to “deterioration in the degree of compliance with policies or procedures”

that leaves me wondering if there is more that Intel could do to improve their existing internal

controls.

The outside independent accounting firm, Ernst & Young, while endorsing the company’s

assessment that the financial statement complies with the regulations does reinforce the risks

involved because of limitations of the internal controls. Though it is not clear from the 10-K, one

would hope there was extensive and timely sharing of information between Intel’s management

and Ernst & Young during the auditing process. Ernst & Young has been the choice firm for Intel

for quite a few years. It could be that the firm is very familiar with the financial practices at Intel

and thus may operate with a degree of openness. A cautious approach would be for Intel to

switch these accounting firms on a periodic basis to get a fresh perspective from different set of

players.

(Chapter 6)

Intel’s 10-K inventory disclosure is broken in to three specific parts. Raw materials (presumably

all semiconductor related materials are common for all the products made by Intel), Work in

Process and finished goods. Intel, being a manufacturing concern, with chip making plants in

multiple countries would need to divide it this way to accurately describe the inventories to

accurately describe the financial value. All three of them appear as a single entry in the balance

sheet. Intel which only manufactures semiconductor based products would not need multiple

inventory accounts.

Intel valuates inventory cost based on a first-in, first-out (FIFO) method. Inventory that is

purchased first is used in production before inventory that is purchased at a later date.

Semiconductor field is a rapidly changing technology (Moore’s law). Though 10-K doesn’t

specifically state the reason why Intel uses this method, given the constant need to replenish

the raw materials with changing technological components (old inventory not suitable for use in

production), it makes most sense for Intel to use this method. This method is probably employed

by most computer tech companies that are in manufacturing field - Apple, Samsung to name a

few.

Intel carries $3,620 million as gross accounts receivable out of which $38 million is allocated as

allowance for doubtful accounts). Balance sheet show $3,582 million as the net accounts

receivable.

Intel declares in 10-K that 34% of the Accounts Receivable are from three of its largest

customers, which also happen to constitute 44% of the net revenue. The three customers are

Hewlett- Packard, Dell and Lenovo. All these are major reputable companies with established

global market presence and Intel’s assessment that these do not represent a significant credit

risk is a fair assessment. There is no mention of the rest of the 66% of the Accounts

Receivables. This is most likely due to the fact that Intel’s chips are used by a plethora of

electronic companies and thus might be a lot of information to list in the form.

Intel declares that it gives loans to third parties and that are classified within other current assets

or other long-term assets. They appear in the detailed assets fair value declaration. Also, the

consolidated statement of cash flows list two receivable: Collection of Loans Receivable -

representing cash inflow ($132 million) from loans made to third parties. And Origination of

Loans Receivable - representing cash outflow (-$200 million) for new loans made to third

parties. The amount listed under these receivables are relatively low compared to the net cash.

Intel has only allocated approximately 1% of the total gross accounts receivables over the past

few years (since 2009) for allowance for doubtful accounts receivable. 10-K lists the track record

of the allocation v actual for the past three years and the data from the last two years is on

target. Judging by the past history, the current 1.07% is probably a safe estimate.

(Chapter 7)

Intel declared a substantial amount of its current assets that are fixed assets

Land and buildings - $21,098 million

Machinery and equipment - $40,540 million

Construction in progress - $11,778 million

These are costs that Intel paid for these assets when they were bought in the past. Intel

estimates that $41,988 million of the total assets above are depreciated and the assets are

currently worth $31,428

Intel states that they use the simplest and most often used method - the straight-line method, to

compute depreciation for financial reporting purpose.

Annual Depreciation expense = (Cost of fixed asset – residual value)/ useful life of asset. The

estimated useful lives used by Intel is 2 to 4 years machinery and equipment; 10 to 25 years for

buildings.

Intel identifies $5,150 million as intangible assets. Intel proprietary technology that it licenses to

third parties and intellectual property in the form of patents seem to constitute the majority of

these assets. Research citation analysis puts Intel second to IBM in tech sector and Intel has

one of the highest R&D budgets, based on these facts the amount listed in the financial reports

seem to be justified.

REFERENCES:

Survey of Accounting, 7th ed., Carl S. Warren

http://www.intc.com/annuals.cfm

http://www.prime-patent.com/intel-patent-portfolio/