Sashi Velnati, ID: 000727010

Publicly Traded Company Assignment, Paper # 2

(Chapter 5)

Intel Corporations internal controls over financial reporting and preparation of financial
statements seem to comply with GAAP principles. Based on the statements including in the 10K 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 Intels 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 Intels 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.
Intels 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 companys
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 Intels 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)

Intels 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 (Moores law). Though 10-K doesnt
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 Intels 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 Intels 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/