Avnet 2005 Annual Report Download - page 32

condition of specific customers were to deteriorate, management would evaluate whether additional al-
lowances and corresponding charge to the consolidated statement of operations are required.
Valuation of Inventories
Inventories are recorded at the lower of cost (first in Ì first out) or estimated market value. The
Company's inventories include high-technology components, embedded systems and computing technologies
sold into rapidly changing, cyclical and competitive markets whereby such inventories may be subject to early
technological obsolescence.
The Company regularly evaluates inventories for excess, obsolescence or other factors that may render
inventories less marketable. Write-downs are recorded so that inventories reflect the approximate net
realizable value and take into account the Company's contractual provisions with its suppliers, which provide
certain protections to the Company for product obsolescence and price erosion in the form of rights of return
and price protection. Because of the large number of transactions and the complexity of managing the process
around price protections and stock rotations, estimates are made regarding adjustments to the carrying amount
of inventories. Additionally, assumptions about future demand, market conditions and decisions to discontinue
certain product lines can impact the decision to write down inventories. If assumptions about future demand
change or actual market conditions are less favorable than those projected by management, management
would evaluate whether additional write-downs of inventories are required. In any case, actual values could be
different from those estimated.
Accounting for Income Taxes
Management judgment is required in determining the provision for income taxes, deferred tax assets and
liabilities and the valuation allowance recorded against net deferred tax assets. The carrying value of the
Company's net operating loss carry-forwards is dependent upon its ability to generate sufficient future taxable
income in certain tax jurisdictions. In addition, the Company considers historic levels of income, expectations
and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning
strategies in assessing a tax valuation allowance. Should the Company determine that it is not able to realize
all or part of its deferred tax assets in the future, an additional valuation allowance may be recorded against the
deferred tax assets with a corresponding charge to income in the period such determination is made.
The Company establishes reserves for potentially unfavorable outcomes of positions taken on certain tax
matters. These reserves are based on management's judgments and estimates of probable future tax liabilities.
As these estimates are highly judgmental, there may be differences between the anticipated and actual
outcomes of these matters that may result in reversals of reserves or additional tax liabilities in excess of the
reserved amounts. To the extent such adjustments are warranted, the Company's effective tax rate may
potentially fluctuate as a result.
Restructuring, Integration and Impairment Charges
The Company has been subject to the financial impact of integrating acquired businesses and charges
related to business reorganizations. In connection with such events, management is required to make estimates
about the financial impact of such matters that are inherently uncertain. Accrued liabilities and reserves are
established to cover the cost of severance, facility consolidation and closure, lease termination fees, inventory
adjustments based upon acquisition-related termination of supplier agreements and/or the re-evaluation of the
acquired working capital assets (inventory and accounts receivable), and write-down of other acquired assets
including goodwill. Actual amounts incurred could be different from those estimated.
Additionally, in assessing the Company's goodwill for impairment in accordance with the Financial
Accounting Standards Board (""FASB'') Statement of Financial Accounting Standards No. 142
(""SFAS 142''), Goodwill and Other Intangible Assets, the Company is required to make significant
assumptions about the future cash flows and overall performance of its reporting units. Should these
assumptions or the structure of the reporting units change in the future based upon market conditions or
changes in business strategy, the Company may be required to record impairment charges to goodwill.
24