Adaptec 2002 Annual Report Download - page 28

Critical Accounting Estimates
General
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our
Consolidated Financial Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the amounts reported by us of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on
historical experience and on various other assumptions that are reasonable in the circumstances. Senior
management has discussed the development, selection and disclosure of these estimates with the Audit
Committee of PMC's Board of Directors. Actual results may differ from these estimates under different
assumptions or conditions.
Our significant accounting policies are outlined in Note 1 to the Consolidated Financial Statements. In
management's opinion the following critical accounting policies require the most significant judgment and
involve complex estimation. We also have other policies that we consider to be key accounting policies, such
as our policies of revenue recognition, including the deferral of revenues on sales to major distributors;
however these policies do not meet the definition of critical accounting estimates as they do not generally
require us to make estimates or judgments that are difficult or subjective.
Restructuring charges − Facilities
In calculating the cost to dispose of our excess facilities we had to estimate for each location the amount
to be paid in lease termination payments, the future lease and operating costs to be paid until the lease is
terminated, and the amount, if any, of sublease revenues. This required us to estimate the timing and costs
of each lease to be terminated, the amount of operating costs for the affected facilities, and the timing
and rate at which we might be able to sublease each site. To form our estimates for these costs we performed
an assessment of the affected facilities and considered the current market conditions for each site.
During 2001, we recorded total charges of $155 million for the restructuring of excess facilities as part of
restructuring plans, which was approximately 53% of the estimated total future operating cost and lease
obligation for those sites. As at the end of 2002, the remaining restructuring accrual is 50% of the
estimated total future operating costs and lease obligations for the remaining sites. To the best of our
knowledge, this estimate remains sufficient to cover anticipated settlement costs. However, our assumptions
on either the lease termination payments, operating costs until terminated, or the amounts and timing of
offsetting sublease revenues may turn out to be incorrect and our actual cost may be materially different
from our estimates.
Inventory
We periodically compare our inventory levels to sales forecasts for the future twelve months on a
part−by−part basis and record a charge for inventory on hand in excess of the estimated twelve−month demand.
In 2002, our inventory of networking products exceeded estimated 12−month demand by $4 million and we
recorded a charge of that amount. If future demand for our products continues to decline, we may have to
take an additional write−down of inventory.
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