Organization and Significant Accounting Policies

Organization

Integrated Silicon Solution, Inc. (the “Company”) was incorporated in California on October 27, 1988 and reincorporated in Delaware on August 9, 1993. The Company is a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) automotive, (ii) communications, (iii) industrial, medical and military, and (iv) digital consumer. The Company’s primary products are low and medium density DRAM and high speed and low power SRAM.

In January 2010, the Company formed a separate business unit, Giantec Semiconductor, Inc. (Giantec), which designs and markets application specific standard products (ASSP) primarily EEPROMs and SmartCards. As part of this formation, a third party invested approximately $3.8 million in Giantec. On December 30, 2010, Giantec received an additional direct investment of $4.0 million from outside investors, and as a result the Company’s ownership interest was reduced to approximately 44% and the Company was required to deconsolidate Giantec. In August 2011, the Company sold approximately 37% of its shares in Giantec and on August 31, 2011, Giantec merged with Maxllent Corp. thereby reducing the Company's ownership interest in Giantec to approximately 19.85%. The Company's consolidated statements of operations reflect accounting for Giantec on a consolidated basis from January 1, 2010 through December 30, 2010. For the period from December 31, 2010 through August 31, 2011, the Company accounted for Giantec on the equity method and the Company's results included its percentage share of Giantec’s results of operations. Effective September 1, 2011, the Company accounts for Giantec on the cost basis.

On January 31, 2011, the Company acquired Si En Integration Holdings Limited (Si En) and the Company’s financial results reflect accounting for Si En on a consolidated basis from the date of acquisition (See Note 19).

On September 14, 2012, the Company acquired Chingis Technology Corporation (Chingis) and the Company’s financial results reflect accounting for Chingis on a consolidated basis from the date of acquisition (See Note 20).

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Integrated Silicon Solution, Inc. and its wholly and majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained at various financial institutions.

Investments

Debt securities and marketable equity securities are classified as “available-for-sale”. Available-for-sale securities are recorded at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss). Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest and other income, net. The cost of fixed income securities sold is based on the specific identification method and the weighted-average method is used to determine the cost basis of publicly traded equity securities disposed of. Interest and dividends on securities classified as available-for-sale are included in interest and other income, net.

The Company accounts for non-marketable equity and other equity investments for which it does not have control over the investee as equity method investments when the Company has the ability to exercise significant influence, but not control, over the investee. The Company accounts for non-marketable equity and and other equity investments as non-marketable cost method investments when the equity method does not apply. The Company's non-marketable equity and other equity investments are included in other assets in its consolidated balance sheet.

The Company regularly reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is determined to be other than temporary, the cost basis of the investment is written down to fair value, and the amount of the write-down is included in the consolidated statements of operations.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. The Company’s inventory valuation process is done on a part-by-part basis. Lower of cost or market adjustments, specifically identified on a part-by-part basis, reduce the carrying value of the related inventory and take into consideration reductions in sales prices. Determining the market value of inventories on hand and at distributors as of the balance sheet date involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories. When market values are below the Company’s costs, the Company records a charge to cost of goods sold to write down inventories to estimated market value in advance of when the inventories are actually sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect the Company’s operating results. If actual market conditions are more favorable, the Company may have higher gross margins when such products are sold. The Company writes down to zero dollars the carrying value of inventory on hand that has aged over one year (two years for wafer and die bank) to cover estimated excess and obsolete exposures, unless adjustments are made based on management’s judgments for newer products, end of life products, planned inventory increases or strategic customer supply. Once established, these write-downs are considered permanent.

Property, Equipment and Leasehold Improvements

Property, equipment, and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method, based upon the shorter of the estimated useful lives ranging from two to ten years for property and equipment and fifty years for buildings or the lease term for leasehold improvements to leased properties.

Goodwill and Purchased Intangible Assets

The Company tests goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if events or circumstances require an interim impairment assessment. For goodwill, the Company either makes a qualitative assessment prior to proceeding to step 1 of the annual goodwill impairment test or performs a two-step impairment test. If the Company makes a qualitative assessment and it determines that the fair value of the reporting unit is less than its carrying amount, the Company would perform step 1 of the annual goodwill impairment test and, if necessary, proceed to step 2. Otherwise, no further evaluation is necessary. For the two-step impairment test, in the first step, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company determines the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company performs the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference.

Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets with definite lives are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally six months to eight years.

The Company has acquired in-process research and development (IPR&D) projects as the result of its business combinations (see Note 6). The fair values of the acquired IPR&D projects were determined through estimates and valuation techniques based on the terms and details of the related acquisitions. The amounts allocated to IPR&D projects are not expensed for acquisitions after the beginning of fiscal 2011, until technological feasibility is reached for each project. Upon completion of development for each project, the acquired IPR&D will be amortized over its useful life. The Company assesses the status of each IPR&D project quarterly to evaluate whether the carrying value has been impaired.

Valuation of Long-Lived Assets and Certain Identifiable Intangibles

The Company evaluates the recoverability of property, plant and equipment and identifiable intangible assets through the performance of periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment and identifiable intangible assets exceed their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment and identifiable intangible assets might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful life is compared to their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values based on the expected discounted future cash flows attributable to the assets.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) as well as other comprehensive income (loss). The Company’s other comprehensive income (loss) consists of changes in cumulative translation adjustment, unrealized gains and losses on investments and retirement plan transition obligation and actuarial gains and losses.

Comprehensive income (loss), net of taxes (which were immaterial for all periods presented), was as follows:



	Years Ended September 30,
	2012			2011			2010
	(in thousands)
Consolidated net income (loss)	$	(2,605	)	$	56,123		$	42,755
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment:
Changes arising during current year	3,932			1,850			1,839
Reclassification for gain included in net income (loss)	—			—			—
Change in unrealized gain (loss) on investments:
Changes arising during current year	(1,523		)	57			746
Reclassification for (gain) loss included in net income (loss)	1,213			—			(1,673		)
Change in retirement plan transition asset	(196		)	(50		)	(47		)
Change in retirement plan actuarial losses	225			(823		)	(1,807		)
Comprehensive income (loss)	1,046			57,157			41,813
Comprehensive income (loss) attributable to noncontrolling interests	(113		)	(166		)	(559		)
Comprehensive income (loss) attributable to ISSI	$	933		$	56,991		$	41,254

The components of accumulated other comprehensive income (loss), net of tax, were as follows at September 30:



	2012			2011
	(In thousands)
Accumulated foreign currency translation adjustments	$	6,048		$	2,116
Accumulated net unrealized loss on SMIC (net of tax of $716 in 2011)	—			(1,213		)
Accumulated net unrealized loss on Nanya (net of tax of $312 in 2012)	(1,523		)	—
Accumulated net retirement plan transition asset (net of tax of $119 in 2012)	115			311
Accumulated net retirement plan actuarial losses (net of tax of $323 in 2012)	(2,241		)	(2,466		)
Total accumulated other comprehensive income (loss)	$	2,399		$	(1,252	)

The estimated net prior service cost, actuarial loss, and transition obligation for the Company's defined benefit plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during fiscal year 2013 is $0, $101,000, and $(60,000), respectively.

Revenue Recognition and Accounts Receivable Allowances

Revenue from product sales (net of any applicable value added tax) to the Company’s direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. The Company makes estimates of potential future product returns and sales allowances related to current period product revenue. Management analyzes historical returns, changes in customer demand, and acceptance of products when evaluating the adequacy of sales returns and allowances. Estimates made by the Company may differ from actual product returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately collected on accounts receivable.

A portion of the Company’s sales is made to distributors under agreements that provide the possibility of certain price adjustment credits, as discussed below, and to return qualifying products for credit, as determined by the Company, in order to reduce the amounts of slow-moving, discontinued or obsolete product from their inventory. These agreements limit such returns to a certain percentage of the value of the Company's shipments to that distributor during the prior quarter. In addition, distributors are allowed to return unsold products if the Company terminates the relationship with the distributor.

Certain distributors are granted price adjustment credits related to many of their sales to their customers. Price adjustment credits are granted when a distributor’s standard cost (i.e., the Company’s sales price to the distributor) does not provide the distributor with an appropriate margin on its sales to its customers. As a result, the distributor may request and receive a price adjustment credit from the Company to allow the distributor to earn an appropriate margin on the transaction. Certain distributors are also granted price adjustment credits in the event of a price decrease subsequent to the date the product was shipped and billed to the distributor. Generally, the Company will provide a credit equal to the difference between the price paid by the distributor (less any prior credits on such products) and the new price for the product multiplied by the quantity of such product in the distributor’s inventory at the time of the price decrease. Certain of the Company’s distributor arrangements may allow or require the granting of price concessions below the Company’s cost for a product.

Given the uncertainties associated with the levels of returns and other price adjustment credits that will be issued to these distributors, the sales price to distributors is not fixed or determinable until the distributors resell the products to their customers. Therefore, the Company defers revenue recognition from sales to these distributors until the distributors have sold the products to their end customers.

Title to the inventory transfers to a distributor at the time of shipment or delivery to the distributor, and payment from the distributor is due in accordance with the Company's standard payment terms. These payment terms are not contingent upon the distributors’ sale of the products to their customers. Upon title transfer to distributors, inventory is reduced for the cost of goods shipped, the deferred distributor margin (sales less cost of sales) is recorded as a liability and an account receivable is recorded.

The deferred costs of sales to distributors may be subject to impairment. The Company monitors the level and nature of product returns from distributors as well as the levels of inventory held at distributors. On a quarterly basis, the Company reviews the inventory held at distributors in terms of the Company’s inventory valuation policy and records a charge to cost of goods sold for all known lower of cost or market and excess and obsolescence issues.

In addition, the Company monitors collectibility of accounts receivable primarily through review of its accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made.

The following describes activity in the accounts receivable allowance for doubtful accounts for the years ended September 30, 2012, 2011 and 2010.



Description	Balance at Beginning of Year		Adjustments to Costs and Expenses⁽¹⁾			Deductions⁽²⁾			Balance at End of Year
	(in thousands)
Accounts receivable—Allowance for doubtful accounts:
2010	$	1,338	$	13		$	(1,197	)	$	154
2011	$	154	$	362		$	(20	)	$	496
2012	$	496	$	(2	)	$	14		$	508

________________________


(1)	Includes increases/(decreases) charged or credited to costs and expenses.


(2)	Uncollectible accounts written off, net of recoveries.

Research and Development

Research and development expenditures are charged to operations as incurred.

Foreign Currency Translation

The Company uses the local currency as its functional currency for all foreign subsidiaries. Translation adjustments, which result from the process of translating foreign currency financial statements into U.S. dollars, are included in the accumulated other comprehensive income component of stockholders’ equity.

Advertising Costs

The Company expenses advertising costs as incurred and includes these costs in selling, general and administrative expenses in the consolidated statement of operations. Advertising costs totaled $59,000, $57,000 and $35,000 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

Income Taxes

The Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. Uncertain tax positions are recognized or derecognized based on the threshold and measurement of a tax position taken or expected to be taken in a tax return. U.S. income tax has not been provided on earnings of foreign subsidiaries to the extent that such earnings are considered to be indefinitely reinvested.

Stock-Based Compensation

Stock-based compensation is measured at the grant date, based on the estimated fair value of the award. The Company amortizes the compensation costs on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. The Company estimates the fair value of stock options using the Black-Scholes valuation model. The Black-Scholes valuation model requires the Company to estimate key assumptions such as expected term, volatility and risk-free interest rates to determine the fair value of a stock option. The estimates of these key assumptions are based on historical information and judgment regarding market factors and trends.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Such estimates relate to the useful lives and residual value of fixed assets, the fair value of investments, allowances for doubtful accounts and customer returns, valuation allowances for deferred tax assets, inventory write-downs, potential reserves relating to litigation matters, accrued liabilities, and other reserves. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs of what could occur in the future, given available information. Actual results may differ from those estimates, and such difference, may be material to the financial statements.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable and accounts payable. The Company believes that the carrying amounts of the financial instruments approximate their respective fair values. When there is no readily available market data, the Company may make fair value estimates, which may not necessarily represent the amounts that will be realized in a current or future sale of these assets.

Concentration of Credit Risk

The Company operates in one business segment, which is to design, develop, and market high performance SRAM, DRAM, and other semiconductor products. The Company markets and distributes its products on a worldwide basis, primarily to original equipment manufacturers, contract manufacturers, and distributors. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral. In fiscal 2012, revenue from the Company’s largest and second largest distributor accounted for approximately 14% and 13%, respectively, of the Company's total net sales. In fiscal 2011, revenue from the Company’s largest and second largest distributor accounted for approximately 15% and 12%, respectively, of the Company's total net sales. In fiscal 2010, revenue from the Company’s largest and second largest distributor, accounted for approximately 15% and 10% of the Company's total net sales.

The Company maintains cash, cash equivalents, and short-term investments with various high credit quality financial institutions. The Company’s investment policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in its investment strategy. The Company is exposed to credit risk in the event of default by the financial institutions or issuers of investments to the extent of the amount recorded on the balance sheet. To date, the Company has not incurred losses related to these investments.

Product Warranty and Indemnifications

The Company generally warrants its products against defects in materials and workmanship for a period of 12 months. Liability for a stated warranty period is usually limited to replacement of defective items or return of amounts paid. If there is a material increase in the rate of customer claims or the Company’s estimates of probable losses relating to specifically identified warranty exposures are inaccurate, the Company may record a charge against future cost of sales. Warranty expense has historically been immaterial to the Company’s financial statements.

The Company may be obligated to indemnify certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which its products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. The terms of the Company’s indemnification obligations are generally perpetual from the effective date of the agreement. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification relating to intellectual property infringement claims. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws provide that indemnification may be provided to the Company’s agents. The Company has directors’ and officers’ insurance pursuant to which the Company may be reimbursed for certain indemnity expenses, subject to the insurers’ reservation of rights. The Company cannot estimate the amount of potential future indemnity expenses that it may be required to make. The amount of available directors’ and officers’ insurance may not be sufficient to cover the Company’s indemnity obligations, which may have a material adverse effect on the Company’s results of operations in future periods.

Net Income (Loss) Per Share

Basic and diluted net loss per share and basic net income per share is computed using the weighted number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding, if applicable, during the period. Common equivalent shares consist of the shares issuable upon the assumed exercise of stock options under the treasury stock method.

Accounting Pronouncements

The following issued accounting pronouncement is not yet effective for the Company as of September 30, 2012.

Comprehensive Income

In June 2011, the Financial Accounting Standards Board (FASB) amended its guidance on the presentation of comprehensive income. This amendment eliminates the currently available option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. Under this amendment, an entity will have the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, this amendment requires that an entity present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB further amended its guidance to defer changes related to the presentation of reclassification adjustments indefinitely as a result of concerns raised that the new presentation requirements would be difficult for preparers and add unnecessary complexity to financial statements. The amendment (other than the portion regarding the presentation of reclassification adjustments which, as noted above, has been deferred indefinitely) becomes effective for the Company beginning in the first quarter of fiscal 2013 and is to be applied retrospectively. This amendment will impact the presentation of the financial statements but will not impact the Company's financial position, results of operations or cash flows.

Impact of Recently Issued Accounting Standards

During fiscal 2012, the Company adopted the following accounting standards, which did not have a material effect on its consolidated results of operations during such period or financial condition at the end of such period:

Fair Value Measurement

In May 2011, the FASB amended its guidance to converge fair value measurement and disclosure guidance in U.S. GAAP with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. The amendment changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendment to result in a change in the application of the requirements in the current authoritative guidance.

Business Combinations

In December 2010, the FASB amended its guidance on business combinations. Under the amended guidance, a public entity that presents comparative financial statements must disclose the revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the prior annual reporting period.

Intangibles – Goodwill and Other

In December 2010, the FASB amended its guidance on goodwill and other intangible assets. The amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. The qualitative factors are consistent with the existing guidance which requires the goodwill of a reporting unit to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Reclassifications

Certain reclassifications have been made to prior year balances in order to conform to the current year’s presentation.