2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Company's fiscal year ends on the last calendar day of February (referred to as “fiscal”). The consolidated financial statements include the accounts of the Company and its subsidiaries (all wholly-owned) after elimination of all intercompany accounts and transactions.

Reclassifications

Certain items in the fiscal year 2010 consolidated financial statements have been reclassified to conform to the fiscal 2012 and 2011 presentation reflected in these consolidated financial statements. Specifically, the Company reclassified a negligible amount in amortization of technology intangibles previously included in selling, general and administrative costs to cost of goods sold on the consolidated statements of operations for fiscal 2010 to conform to the current period presentation.

Out-of-Period Adjustment

Gross profit and operating results for fiscal 2010 include a credit to cost of goods sold of approximately $1.0 million for the reduction of accounts payable related to an unreconciled amount within inventory received not invoiced to correct a cumulative error from prior periods. This adjustment was recorded in the fourth quarter of fiscal 2010.

The Company does not believe that this adjustment noted above was material to the consolidated financial statements for the periods in which the error originated and in which it was corrected and thus has not restated its consolidated financial statements for this period.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The Company bases 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. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist principally of cash in banks, money market account balances or other highly liquid instruments purchased with original maturities of three months or less.

Long-term Investments

Long-term investments consist of highly rated auction rate securities (most of which are backed by U.S. Federal or state and municipal government guarantees) and other marketable debt with remaining maturities of greater than one year and equity securities held as available-for-sale investments. Auction rate securities are long-term variable rate bonds tied to short-term interest rates that were, until February 2008, reset through a “Dutch auction” process. In the fourth quarter of fiscal 2008, such investments became subject to adverse market conditions, and the liquidity typically associated with the financial markets for such instruments became restricted as auctions began to fail. As such, the Company has classified its investments in auction rate securities as long-term. Considering such determination on market conditions, the high quality of these investments (and underlying guarantees) and given the Company has adequate cash, working capital and cash flow from operations to meet current operating needs, management has determined that impairment of these investments is not other than temporary at this time. Given the circumstances, these securities were subsequently classified as long-term (or short-term if stated maturity dates were within one year of the reported balance sheet date), reflecting the restrictions on liquidity and the Company's intent to hold until maturity (or until such time as the principal investment could be recovered through other means, such as issuer calls and redemptions). Management will continue to monitor market conditions, and may deem that impairment is other than temporary if market conditions do not improve in the foreseeable future or if the credit quality of the underlying issuer deteriorates. The Company is currently liquidating such investments as opportunities arise.

Accounts Receivable, Revenue Recognition and Deferred Income from Distribution

The Company's accounts receivable result from trade credit extended on shipments to original equipment manufacturers, original design manufacturers and electronic component distributors. The Company can have individually significant accounts receivable balances from its larger customers. At February 29, 2012 and February 28, 2011, one customer accounted for more than 10 percent of gross accounts receivable, with a combined balance totaling $9.8 million and $27.4 million, respectively. The Company manages its concentration of credit risk on accounts receivable by performing ongoing credit evaluations of its customers' financial condition and limiting the extension of credit when deemed necessary. In addition, although the Company generally does not request collateral in advance of shipment, prepayments or standby letters of credit may be required and have been obtained in certain circumstances, and the Company has bought third-party credit insurance policies with respect to certain customers to reduce credit concentration exposure. The Company maintains an allowance for potential credit losses, taking into consideration the overall quality and aging of the accounts receivable portfolio and specifically identified customer risks.

The Company recognizes sales from product shipments to original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”) and direct customers at the time of shipment, net of appropriate reserves for product returns and allowances. The Company's terms of shipment are customarily ex-works (at SMSC warehouse) or CIP (carriage and insurance paid).

Certain of the Company's products are sold to electronic component distributors under agreements providing for price protection and rights to return unsold merchandise. Accordingly, recognition of revenue and associated gross profit on shipments to a majority of the Company's distributors is deferred until the distributors resell the products. At the time of shipment to distributors, the Company records a trade receivable for the selling price, relieves inventory for the carrying value of goods shipped, and records the gross margin as deferred income from distribution on the consolidated balance sheets. This deferred income represents the gross margin on the initial sale to the distributor; however, the amount of gross margin recognized in future consolidated statements of operations will typically be less than the originally recorded deferred income as a result of price allowances. Price allowances offered to distributors are recognized as reductions in product sales when incurred, which is generally at the time the distributor resells the product. Shipments made by the Company's Japanese subsidiary to distributors in Japan are made under agreements that permit limited stock return and no price protection privileges. Revenue for shipments to distributors in Japan is recognized as title passes to such distributors upon delivery.

Deferred income on shipments to distributors consists of the following (in thousands ):

	February 29, 2012			February 28, 2011
Deferred sales revenue	$	26,488		$	26,609
Deferred COGS		(4,759	)		(4,904	)
Provisions for sales returns		589			757
Distributor advances for price allowances		(3,869	)		(6,295	)
	$	18,449		$	16,167

The Company recognizes intellectual property revenues upon notification of sales of the licensed technology by its licensees, absent any other contractual contingencies which might impact the extent and timing of payment. The terms of the Company's licensing agreements generally require licensees to give notification to the Company and to pay royalties no later than 60 days after the end of the quarter in which the sales take place.

Inventories and Costs of Goods Sold

Inventories are valued at the lower of cost (on a first-in, first-out basis) or market. The Company establishes inventory allowances for estimated obsolescence or unmarketable inventory for the difference between the cost of inventory and estimated fair value based upon assumptions about future demand and market conditions.

Costs of goods sold includes the cost of inventory, shipping and handling costs borne by the Company in connection with shipments to customers, royalties associated with certain products and depreciation on productive assets (principally, test equipment and facilities). Costs of goods sold also include amortization of acquired product technologies. Such amortization totaled the following amounts (in thousands):

For the Fiscal Years Ended February 29 and 28		2012				2011				2010
Product Technology Amortization		$	6,984			$	5,431			$	4,321

Property, Plant and Equipment

Property, plant and equipment are carried at cost and depreciated on a straight-line basis over the estimated useful lives of buildings and leasehold improvements (2 to 25 years), machinery and equipment (3 to 7 years) and computer systems and software (2 to 7 years). Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the Company's consolidated statements of operations.

Depreciation expense related to property, plant and equipment was as follows (in thousands):

For the Fiscal Years Ended February 29 and 28		2012				2011				2010
Depreciation expense		$	20,156			$	17,053			$	19,083

Investments in Equity Securities

The Company considers the guidance in ASC Topic 325, “Investments – Other” (“ASC 325”) and ASC Topic 810, “Consolidation” (“ASC 810”) in determining the appropriate accounting treatment for investments in equity securities representing less than a controlling interest in the related entities. Such investments are carried at cost, unless facts and circumstances indicate that either (i) the Company has significant influence over the operations of the investment and therefore accounts for the investment under the equity method or (ii) consolidation of the related business is warranted, as may be the case if such entities were deemed to be a variable interest entity. The cost of such investments is reflected in the Investments in equity securities caption of the Company's consolidated balance sheets, and are periodically reviewed for indications of impairment in value. The cost basis of any investment for which potential indications of impairment exist that were deemed other than temporary would be reduced accordingly, with a charge to results of operations.

Goodwill and Intangible Assets

Goodwill is recorded as the difference, if any, between the aggregate fair value of consideration exchanged for an acquired business and the fair value (measured as of the acquisition date) of total net tangible and identified intangible assets acquired. In accordance with ASC Topic 350, “ Intangibles - Goodwill and Other” (“ASC 350”), goodwill and intangibles with indefinite lives are not amortized but are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Intangible assets with finite useful lives are amortized over their estimated useful lives and are reviewed for impairment when indicators of impairment, such as reductions in demand, are present. The Company conducts annual reviews for goodwill and indefinite-lived intangible assets in the fourth quarter of each fiscal year. All finite-lived intangible assets are being amortized on a straight-line basis, which approximates the pattern in which the estimated economic benefits of the assets are realized, over their estimated useful lives.

For goodwill impairment testing purposes, the Company has three reporting units: the automotive reporting unit, the wireless audio reporting unit and the analog/mixed signal reporting unit. The automotive unit consists primarily of those portions of the business that were acquired in the March 30, 2005 acquisition of OASIS including the infotainment networking technology known as Media Oriented Systems Transport (“MOST”). The automotive unit also includes those portions of the business that were acquired in the November 5, 2009 acquisition of K2L. The wireless audio unit consists of those portions of the business that were acquired in the May 19, 2011 acquisition of BridgeCo, the February 16, 2010 acquisition of Kleer and the June 14, 2010 acquisition of STS. The analog/mixed signal reporting unit is comprised of the remaining portions of the business, which includes portions of the business remaining from the November 12, 2010 acquisition of Symwave.

The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of its reporting units is less than its carrying value. If, based on that assessment, the Company believes it is more likely than not that the fair value of its reporting units is less than its carrying value, a two-step goodwill impairment test is performed. If the two-step goodwill impairment test is considered necessary, the Company considers both the market and income approaches in determining the estimated fair value of the reporting units, specifically the market multiple methodology and discounted cash flow methodology. The market multiple methodology involves the utilization of various revenue and cash flow measures at appropriate risk-adjusted multiples. Multiples are determined through an analysis of certain publicly traded companies that are selected on the basis of operational and economic similarity with the business operations. Provided these companies meet these criteria, they will be considered comparable from an investment standpoint even if the exact business operations and/or characteristics of the entities are not the same. Revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples are calculated for the comparable companies based on market data and published financial reports. A comparative analysis between the Company and the public companies deemed to be comparable form the basis for the selection of appropriate risk-adjusted multiples for the Company. The comparative analysis incorporates both quantitative and qualitative risk factors which relate to, among other things, the nature of the industry in which the Company and other comparable companies are engaged. In the discounted cash flow methodology, long-term projections prepared by the Company are utilized. The cash flows projected are analyzed on a “debt-free” basis (before cash payments to equity and interest bearing debt investors) in order to develop an enterprise value. A provision, based on these projections, for the value of the Company at the end of the forecast period, or terminal value, are also made. The present value of the cash flows and the terminal value are determined using a risk-adjusted rate of return, or “discount rate.”

Impairments

Long-lived Assets

The Company assesses the recoverability of long-lived assets, including property, plant and equipment and definite-lived intangible assets, whenever events or changes in circumstances indicate that future undiscounted cash flows expected to be generated by an asset's disposition or use may not be sufficient to support its carrying value. If such cash flows are not sufficient to support the asset's recorded value, an impairment charge is recognized upon completion of such assessment to reduce the carrying value of the long-lived asset to its estimated fair value.

Goodwill

Goodwill is tested for impairment in value annually as of the last day in the Company's fiscal year, as well as when events or circumstances indicate possible impairment in value. The Company performs an annual goodwill impairment test for each of its three reporting units (automotive, wireless audio, and analog/mixed signal) during the fourth quarter of each fiscal year. The Company completed its most recent annual goodwill impairment test during the fourth quarter of fiscal 2012 for each of its three reporting units. Upon completion of the fiscal 2012 assessment, it was determined that no impairment in value was identified.

Intangible Assets

Indefinite-lived intangible assets are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. During the fourth quarter of fiscal 2011, the Company lost its primary customer in its storage solutions business. As a result, the Company initiated a plan to reduce costs and investments in this business. In connection with this action, the Company incurred an impairment loss of $3.5 million, primarily for certain indefinite-lived purchased technologies acquired as part of this business. The fair value of the Symwave purchased technologies was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, which is a Level 3 input. Key assumptions include a discount rate of 15 percent and a probability-adjusted level of annual revenues.

Acquisition Termination Fee Gain

On January 9, 2011, the Company and Conexant Systems, Inc. (“Conexant”) entered into an Agreement and Plan of Merger (“Merger Agreement”). The agreement was terminated by Conexant pursuant to the terms and conditions specified in the Merger Agreement on February 23, 2011. As a result, Conexant paid SMSC a termination fee of $7.7 million which was recorded within income from operations in fiscal year 2011.

Foreign Currency

Translation of Foreign Currencies

The functional currencies of the Company's foreign subsidiaries are their respective local currencies. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Beginning in the third quarter of fiscal 2010, results of operations are translated using the average exchange rates during the period. Prior to the third quarter of fiscal 2010, results of operations were translated using the daily spot rate on the date the transaction is posted. The impact of this change on results of operations was not material. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within shareholders' equity.

Foreign Exchange Contracts

The majority of the Company's revenues, expenses and capital expenditures are transacted in U.S. dollars. However, the Company does transact business in other currencies, primarily the Japanese Yen and the Euro. From time to time, the Company has entered into forward currency exchange contracts to hedge against the impact of currency fluctuations on transactions not denominated in the functional currency of the transacting entity. The intent of these contracts is to offset foreign currency transaction gains and losses with gains and losses on the forward contracts, so as to help mitigate the risks associated with currency exchange rate fluctuations. The Company does not enter into forward currency exchange contracts solely for speculative or trading purposes. Gains and losses on such contracts have not been significant.

Accumulated Other Comprehensive Income

The Company's other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on investments classified as available-for-sale, and changes in minimum pension liability adjustments.

The components of the Company's accumulated other comprehensive income as of February 29, 2012, February 28, 2011, and February 28, 2010, net of taxes were as follows (in thousands):

	2012			2011			2010
Unrealized losses on investments (net of tax of $49, $46, and $86 as of February 29, 2012, February 28, 2011, and February 28, 2010, respectively)	$	(2,046	)	$	(1,864	)	$	(3,576	)
Foreign currency translation		8,340			10,767			6,394
Minimum pension liability adjustment (net of tax of $517, $244, and $30 as of February 29, 2012, February 28, 2011, and February 28, 2010, respectively)		(810	)		(415	)		(42	)
Accumulated other comprehensive income	$	5,484		$	8,488		$	2,776

Income Taxes

The Company accounts for income taxes under the asset and liability method which includes the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements. Under this approach, deferred taxes are recorded for the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial statement and tax bases of our assets and liabilities, and are adjusted for changes in tax rates and tax laws when changes are enacted. The effects of future changes in income tax laws or rates are not anticipated.

The Company is subject to income taxes in the United States and numerous foreign jurisdictions. The calculation of our tax provision involves the application of complex tax laws and requires significant judgment and estimates. We evaluate the realizability of our deferred tax assets for each jurisdiction in which we operate at each reporting date, and we establish a valuation allowance when it is more likely than not that all or a portion of our deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the same character and in the same jurisdiction. We consider all available positive and negative evidence in making this assessment, including, but not limited to, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. In circumstances where there is sufficient negative evidence indicating that our deferred tax assets are not more likely than not realizable, we establish a valuation allowance.

The Company applies ASC 740, “Income Taxes” (“ASC 740”) in the accounting for uncertainty in income taxes recognized in its financial statements. ASC 740 requires that all tax positions be evaluated using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Differences between tax positions taken in a tax return and amounts recognized in the financial statements are recorded as adjustments to income taxes payable or receivable, or adjustments to deferred taxes, or both. The Company believes that its accruals for uncertain tax positions are adequate for all open audit years based on its assessment of many factors including past experience and interpretation of tax law. To the extent that new information becomes available which causes the company to change its judgment about the adequacy of its accruals for uncertain tax positions, such changes will impact income tax expense in the period such determination is made. Our policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense.(see Note 10).

Contingencies

The Company regularly and routinely evaluates risks and exposures existing in the business, and either discloses such matters or records liabilities for such exposures as warranted, following the guidance set forth in ASC 450, “Accounting for Contingencies” (“ASC 450”). In connection with any such evaluation, the Company also considers estimated legal fees (if applicable) associated with such matters in determining amounts to be accrued.

Stock-Based Compensation (Share-Based Payment)

The Company has several stock-based compensation plans in effect under which incentive stock options, non-qualified stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) are granted to employees and directors. After amendment on July 28, 2011 the maximum number of shares that may be delivered pursuant to awards granted under the Long Term Incentive Plan (“LTIP”) is 2,000,000 plus: (i) any shares that have been authorized but not issued pursuant to previously established plans of the Company as of June 30, 2009, up to a maximum of an additional 500,000 shares; (ii) any shares subject to any outstanding options or restricted stock grants under any plan of the Company that were outstanding as of June 30, 2009 and that subsequently expire unexercised, or are otherwise forfeited, up to a maximum of an additional 3,844,576 shares. The maximum number of incentive stock options that may be granted under the LTIP is 1,500,000. No participant may receive awards under the LTIP in any calendar year for more than 1,000,000 share equivalents. The Company has ceased issuing stock options and restricted stock awards under previously established stock option and restricted stock plans, and has ceased issuing SARs, and instead is using the LTIP to issue stock options and RSUs. Stock options are granted with exercise prices equal to the fair value of the underlying shares on the date of grant. New shares are issued in settling stock option exercises and restricted stock units.

Share-based payments to employees, including grants of employee stock options, RSAs, RSUs and SARs, are recognized in the financial statements based on their respective grant date fair values. The Company recognizes compensation expense for SARs using a graded vesting methodology, adjusting for changes in fair value from period to period. In addition, benefits of tax deductions in excess of recognized compensation cost are reported as a financing cash flow.

The Black-Scholes option pricing model is used for estimating the fair value of options and SARs granted and corresponding compensation expense to be recognized. The Black-Scholes model requires certain assumptions, judgements and estimates by the Company to determine fair value, including expected stock price volatility, risk-free interest rate and expected term. The Company based the expected volatility on historical volatility. The Company based the expected term of options granted using the midpoint scenario, which combines historical exercise data with hypothetical exercise data. The expected term of each individual SAR award is assumed to be the midpoint of the remaining term through expiration as of any remeasurement date. Share-based compensation related to RSAs and RSUs is calculated based on the market price of the Company's common stock on the date of grant.

The following table summarizes the stock-based compensation expense for stock options, RSAs, RSUs, employee stock purchase plan shares and SARs included in results of operations (in thousands) :

	Fiscal
	2012		2011		2010
Costs of goods sold	$	662	$	2,710	$	1,629
Research and development		2,487		6,919		4,571
Selling, general and administrative		5,055		14,574		9,770
Stock-based compensation, before income tax benefit	$	8,204	$	24,203	$	15,970
Tax benefit		3,035		8,713		5,749
Stock-based compensation, after income tax benefit	$	5,169	$	15,490	$	10,221

The amounts above exclude $1.8 million, $2.0 million and $1.9 million of expense related to the 401K match in stock issued in fiscal 2012, 2011 and 2010, respectively.

Warranty Costs

The Company generally warrants its products against defects in materials and workmanship and non-conformance to specifications for varying lengths of time, typically twelve to twenty-four months. The majority of the Company's product warranty claims are settled through the return of defective product and shipment of replacement product. Warranty returns are included within the Company's allowance for returns, which is based on historical return rates. Actual future returns could differ from the allowance established. In addition, the Company accrues a liability for specific warranty costs expected to be settled other than through product return and replacement, if a loss is probable and can be reasonably estimated. Product warranty expenses during fiscal 2012, 2011 and 2010 were not material.

Research and Development

Research and development (“R&D”) expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to engineering design tools and computer hardware, subcontractor costs and device prototyping costs. The Company's R&D activities are performed by highly-skilled and experienced engineers and technicians, and are primarily directed towards the design of new integrated circuits; the development of new software drivers, firmware and design tools and blocks of logic; and investment in new product offerings based on converging technology trends, as well as ongoing cost reductions and performance improvements in existing products. Costs for research and development activities are generally expensed in the period incurred.

Advertising Expense

Advertising costs are expensed in the period incurred and are not material to the results of operations in any of the periods presented.

Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average common shares outstanding during the period plus the dilutive effect (if any) of shares issuable through stock options and RSUs as estimated using the treasury stock method. Shares used in calculating basic and diluted net income (loss) per share are reconciled as follows (in thousands) :

For the Fiscal Years Ended February 29 and 28,	2012		2011		2010
Weighted average shares outstanding for basic net income (loss) per share		22,695		22,667		22,133
Dilutive effect of stock options and RSUs		508		441		-
Weighted average shares outstanding for diluted net income (loss) per share		23,203		23,108		22,133

For fiscal 2012, 2011, and 2010, stock options and RSUs covering approximately 1,697,747, 1,417,102 and 3,572,000 common shares, respectively, were excluded from the computation of diluted net income per share because their effects were anti-dilutive.

Business Combinations

The Company accounts for business combinations under the acquisition method and allocates total purchase price for acquired businesses to the tangible and identified intangible assets acquired and liabilities assumed, based on estimated fair values. When a business combination includes the exchange of SMSC common stock, the value of the SMSC common stock was determined using the closing market price as of the date such shares were tendered to the selling parties. The excess purchase price over those fair values is recorded as goodwill. The fair values assigned to tangible and identified intangible assets acquired and liabilities assumed are based on management estimates and assumptions that utilize established valuation techniques appropriate for the semiconductor industry and each acquired business. A liability for contingent consideration, if applicable, is recorded at fair value as of the acquisition date. In determining the fair value of such contingent consideration, management estimates the amount to be paid based on probable outcomes and expectations on financial performance of the related acquired business. The fair value of contingent consideration is reassessed quarterly, with any change in expected value charged to results of operations. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in discount periods, discount rates and probabilities that contingencies will be met.

Fair Value of Financial Instruments

The Company's financial instruments are measured and recorded at fair value. The carrying amounts of the Company's financial instruments approximate fair value due to their short maturities. Financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts receivable, accounts payable and accrued expenses and other liabilities. The Company's non-financial instruments (including: goodwill; intangible assets; and, property, plant and equipment) are measured at fair value when acquired or when there is an impairment charge recognized.

Fair Value Measurements

In September 2006, the FASB issued a new standard for fair value measurement now codified as ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, management considers the principal or most advantageous market in which the Company would transact, and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

In January 2010, the FASB issued new standards in the FASB Accounting Standards Codification 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which require new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. The standards also require disclosure of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements. The standards also clarify existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. The new disclosures regarding Level 1 and 2 fair value measurements and clarification of existing disclosures were adopted by SMSC beginning in the first quarter of fiscal 2011. The adoption of ASC 820 did not have a material effect on our consolidated financial statements.

This pronouncement requires disclosure regarding the manner in which fair value is determined for assets and liabilities and establishes a three-tiered value hierarchy into which these assets and liabilities are grouped, based upon significant inputs as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the lack of significance of the observable parameters to the overall fair value measurement. However, the fair value determination for Level 3 financial instruments may consider some observable market inputs.

The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, short-term and long-term investments (including auction rate securities) and accounts receivable. The Company invests its cash in bank accounts and money market accounts with major financial institutions, in U.S. Treasury and agency obligations, and in debt securities of corporations and agencies with high credit quality. By policy, the Company seeks to limit credit exposure on investments through diversification and by restricting its investments to highly rated securities.

Excess Tax Benefits from Stock-Based Compensation

The Company reported excess tax benefits from stock-based compensation of $0.3 million, $0.3 million and $0.1 million in the consolidated cash flow statements and $0.3 million, $1.3 million and $0.6 million in the consolidated statements of shareholders' equity for fiscal 2012, 2011 and 2010, respectively. The difference in these amounts is attributable to the method of adopting ASC 718 ("ASC 718") on March 1, 2006. Under the provisions of ASC 718, the Company elected to recognize stock-based compensation cost using the modified prospective transition method. Under this method, the Company recognized stock-based compensation cost, including deferred taxes, for all employee stock-based instruments issued or vested after February 28, 2006. No compensation cost or deferred taxes were recorded for employee stock-based instruments that vested on or before February 28, 2006. As a result, all tax benefits from employee stock-based instruments that vested on or before February 28, 2006 are recorded as an increase to additional paid-in capital. Excess tax benefits related to employee stock-based instruments issued or vested after February 28, 2006 result in an increase or decrease to additional paid-in capital or an increase to income tax expense based upon the difference between the amount of stock-based compensation cost reported on the tax return as compared to the consolidated financial statements and the cumulative balance of tax benefits recorded in additional paid-in capital.

Recent Accounting Standards

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011 - 08, “Testing Goodwill for Impairment” (“ASU 2011 - 08”), which permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. The updated guidance is effective for annual impairment tests performed for SMSC beginning in Fiscal 2013 with early adoption permitted. The Company has elected to early adopt ASU 2011 - 08 in connection with its fiscal 2012 impairment analysis. The adoption of this guidance had no impact on our consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update 2011 - 05, “Presentation of Comprehensive Income” (“ASU 2011 - 05”), which provides guidance regarding the presentation of comprehensive income. The new standard requires the presentation 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 December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-12, “ Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”), which defers requirements regarding reclassifications of items out of comprehensive income on the face of the income statement while retaining other requirements of ASU 2011-05. The updated guidance in ASU 2011 – 05 and ASU 2011 – 12 is effective for SMSC beginning in the first quarter of fiscal year 2013. Management believes that the adoption of this guidance will not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued Accounting Standards Update 2011 - 04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011 - 04”), which provides additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for SMSC beginning in the first quarter of fiscal year 2013. Management believes that the adoption of this guidance will not have a material impact on our consolidated financial statements.

In December 2010, the FASB issued Accounting Standards Update 2010 - 29, “Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010 - 29”), which specifies that if a public entity presents comparative financial statements, the entity should disclose 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 comparable prior annual reporting period only. The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The new disclosures required by ASU 2010 – 29 were adopted by SMSC beginning in the first quarter of fiscal 2012. The adoption of ASU 2010 - 29 did not have a material effect on our consolidated financial statements.