Advanced Micro Devices and Financial Engineering

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 |  Includes: AMD, INTC
by: Kenneth Hackel, CFA

At the end of last year, to avoid having to consolidate its investment in Globalfoundries, which, if undertaken would have harmed its financial results and balance sheet, AMD took the unusual step of renouncing its control in that large enterprise.

Adopted by FASB in June, 2009 for adoption beginning in 2010,FAS 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46 (R), changes the method by which entities account for securitizations and special-purpose entities. FASB 166 relates to the consolidation of variable interest entities, and 167 amends existing guidance for when a company “derecognizes” transfers of financial assets. A variable interest entity is a business structure that allows an investor to hold a controlling interest in the entity without that interest translating into possessing enough voting privileges to result in a majority. The new standard requires noncontrolling interests be reported as a separate component of equity and that net income or loss attributable to the parent and noncontrolling interests be separately identified in the statement of operations.

Under this recent accounting rule dealing with variable interest entities, which took effect this year, AMD would have been required to consolidate Globalfoundries' debt and income into AMD. By renouncing its control, AMD is merely required to state its investment as a single line entry, even though it may be partially or wholly on the hook for a share, or all, of its debt.

These type of actions, while having little to no impact on cash flow, can nevertheless serve as signals of impending busineess conditions. For if AMD’s position was strong, we doubt such a transaction would be considered. But that’s the result of a firm with large negative free cash flow with high cost of capital-unlike Intel.

No wonder AMD’s stock has continued to fare poorly.

Disclosure: No positions