SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

Applied Micro Circuits Corporation (the "Company") is a global leader in silicon solutions for next-generation cloud infrastructure and data centers, as well as connectivity products for edge, metro and long-haul communications equipment.

Basis of Presentation

The Condensed Consolidated Financial Statements include all the accounts of the Company's and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company prepared the accompanying unaudited Condensed Consolidated Financial Statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

In management’s opinion, the unaudited Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the Company's financial position, results of operations and cash flows. Interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the Consolidated Financial Statements and notes thereto in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2016.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to its:


•	capitalized mask sets including their useful lives, which affect cost of goods sold and property and equipment or Research and Development ("R&D") expenses, if not capitalized;


•	inventory valuation, warranty liabilities and revenue reserves, which affect cost of sales, gross margin, and revenues;


•	allowance for doubtful accounts, which affects operating expenses;


•	unrealized losses or other-than-temporary impairments of short-term investments available for sale, which affect interest income (expense), net;


•	valuation of other long-lived assets and goodwill, which affects depreciation and impairment of long-lived assets, impairment of goodwill and apportionment of goodwill related to divestitures;


•	potential costs of litigation, which affect operating expenses;


•	valuation of deferred income taxes, which affects income tax expense (benefit); and


•	stock-based compensation, which affects gross margin and operating expenses.

The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and actual results, future results of operations will be affected.

Risks and Uncertainties

The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's business or future results and cause actual results to vary materially from historical results include, but are not limited to, the highly cyclical nature of the semiconductor industry; high fixed costs; declines in average selling prices; ability to fund liquidity needs; failure to maintain an effective system of internal controls; product return and liability risks; absence of significant backlog; dependence on international operations and sales; proposed changes to United States tax laws which result in adverse tax consequences; inadequate management information systems; ability to attract and retain qualified employees; difficulties consolidating and evolving the operational capabilities; dependence on materials and equipment suppliers; loss of customers; development of new proprietary technology and the enforcement of intellectual property ("IP") rights by or against the Company; the complexity of packaging and test processes; competition; existing and future environmental regulations; and fire, flood or other calamities affecting the Company or others with whom it does business.

The Company's cash, cash equivalents, short-term investments and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents may be redeemable upon demand and are maintained with several financial institutions that management believes are of high credit quality and therefore bear minimal credit risk. The Company's accounts receivables are derived from revenue earned from customers located around the world. Two customers accounted for 75% and 69% of accounts receivable at September 30, 2016 and March 31, 2016, respectively. This concentration and the concentration of credit risk resulting from trade receivables is substantially mitigated by the credit evaluation process and collateral.

The Company sells its products primarily through direct sales force and distributors. Based on direct shipments, 3 customers individually accounted for at least 10% of total net revenues during both the three months and the six months ended September 30, 2016, and 2 customers individually for the corresponding periods ended September 30, 2015, respectively. The Company expects that its largest customers collectively will continue to account for a substantial portion of its net revenue for the foreseeable future. See Note 7, Significant Customer and Geographic Information, to the Condensed Consolidated Financial Statements for details.

The Company currently purchases wafers from a limited number of vendors. Additionally, since the Company does not maintain manufacturing facilities, it depends upon close relationships with contract manufacturers to assemble its products. The Company anticipates the continued use of a limited number of vendors and contract manufacturers in the near future. Under the Company's fabless business model, long-term revenue growth is dependent on its ability to obtain sufficient external manufacturing capacity, including wafer production. The Company believes there are other vendors that can provide the same quality wafers at competitive prices and other contract manufacturers that can provide comparable services at competitive prices.

New Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2016-09, Stock Compensation (Topic 718); Improvements to Employee Share-Based Payment Accounting. The new guidance simplifies several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, policy election to account for forfeitures as they occur rather than on an estimated basis, and classification on the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company has adopted this ASU as of June 30, 2016, with the policy election to account for forfeitures as they occur. The adoption of this accounting standard was not material to the Company’s Condensed Consolidated Financial Statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those years, and early adoption is permitted. The Company does not believe the adoption of this standard will have a material impact on its Condensed Consolidated Financial Statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses presentation and classification of certain cash receipts and cash payments on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Condensed Consolidated Statements of Cash Flows and related disclosures.