Cisco 2011 Annual Report Download - page 123

next 12 months, as VCE scales its operations, the Company expects that it will make additional investments in
VCE and may incur additional losses proportionate with the Company’s ownership percentage.
(e) Product Warranties and Guarantees
The following table summarizes the activity related to product warranty liability during fiscal 2011 and 2010 (in
millions):
July 30, 2011 July 31, 2010
Balance at beginning of fiscal year ............... $ 360 $ 321
Provision for warranties issued .................. 456 469
Payments ................................... (474) (437)
Fair value of warranty liability acquired ........... —7
Balance at end of fiscal year .................... $ 342 $ 360
The Company accrues for warranty costs as part of its cost of sales based on associated material product costs,
labor costs for technical support staff, and associated overhead. The Company’s products are generally covered
by a warranty for periods ranging from 90 days to five years, and for some products the Company provides a
limited lifetime warranty.
In the normal course of business, the Company indemnifies other parties, including customers, lessors, and
parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold
the other parties harmless against losses arising from a breach of representations or covenants or out of
intellectual property infringement or other claims made against certain parties. These agreements may limit the
time within which an indemnification claim can be made and the amount of the claim. In addition, the Company
has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain
similar indemnification obligations to the Company’s agents. It is not possible to determine the maximum
potential amount under these indemnification agreements due to the Company’s limited history with prior
indemnification claims and the unique facts and circumstances involved in each particular agreement.
Historically, payments made by the Company under these agreements have not had a material effect on the
Company’s operating results, financial position, or cash flows.
The Company also provides financing guarantees, which are generally for various third-party financing
arrangements to channel partners and other end-user customers. See Note 7. The Company’s other guarantee
arrangements as of July 30, 2011 that are subject to recognition and disclosure requirements were not material.
(f) Legal Proceedings
Brazilian authorities have investigated the Company’s Brazilian subsidiary and certain of its current and former
employees, as well as a Brazilian importer of the Company’s products, and its affiliates and employees, relating
to alleged evasion of import taxes and alleged improper transactions involving the subsidiary and the importer.
Brazilian tax authorities have assessed claims against the Company’s Brazilian subsidiary based on a theory of
joint liability with the Brazilian importer for import taxes and related penalties. In addition to claims asserted
during prior fiscal years by Brazilian federal tax authorities, tax authorities from the Brazilian state of Sao Paulo
asserted similar claims on the same legal basis during the second quarter of fiscal 2011.
The asserted claims by Brazilian federal tax authorities are for calendar years 2003 through 2007 and the asserted
claims by the tax authorities from the state of Sao Paulo, are for calendar years 2005 through 2007. The total
asserted claims by Brazilian state and federal tax authorities aggregated to approximately $522 million for the
alleged evasion of import taxes, approximately $860 million for interest, and approximately $2.4 billion for
various penalties, all determined using an exchange rate as of July 30, 2011. The Company has completed a
thorough review of the matter and believes the asserted tax claims against it are without merit, and the Company
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