Cisco 2012 Annual Report Download - page 94

the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of
the security. If impairment is considered other than temporary based on condition (i) or (ii) described earlier, the
entire difference between the amortized cost and the fair value of the debt security is recognized in earnings. If an
impairment is considered other than temporary based on condition (iii), the amount representing credit losses
(defined as the difference between the present value of the cash flows expected to be collected and the amortized
cost basis of the debt security) will be recognized in earnings, and the amount relating to all other factors will be
recognized in other comprehensive income (“OCI”).
The Company recognizes an impairment charge on publicly traded equity securities when a decline in the fair
value of a security below the respective cost basis is judged to be other than temporary. The Company considers
various factors in determining whether a decline in the fair value of these investments is other than temporary,
including the length of time and extent to which the fair value of the security has been less than the Company’s
cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to
hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Investments in privately held companies are included in other assets in the Consolidated Balance Sheets and are
primarily accounted for using either the cost or equity method. The Company monitors these investments for
impairments and makes appropriate reductions in carrying values if the Company determines that an impairment
charge is required based primarily on the financial condition and near-term prospects of these companies.
(d) Inventories Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which
approximates actual cost, on a first-in, first-out basis. The Company provides inventory write-downs based on
excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as
the difference between the cost of the inventory and market based upon assumptions about future demand and
charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition,
a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do
not result in the restoration or increase in that newly established cost basis. In addition, the Company records a
liability for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and
suppliers for quantities in excess of the Company’s future demand forecasts consistent with its valuation of
excess and obsolete inventory.
(e) Allowance for Doubtful Accounts The allowance for doubtful accounts is based on the Company’s
assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by
considering factors such as historical experience, credit quality, age of the accounts receivable balances,
economic conditions that may affect a customer’s ability to pay, and expected default frequency rates. Trade
receivables are written off at the point when they are considered uncollectible.
(f) Financing Receivables The Company provides financing arrangements, including leases, financed service
contracts, and loans, for certain qualified end-user customers to build, maintain, and upgrade their networks.
Lease receivables primarily represent sales-type and direct-financing leases. Leases have on average a four-year
term and are usually collateralized by a security interest in the underlying assets, while loan receivables generally
have terms of up to three years. Financed service contracts typically have terms of one to three years and
primarily relate to technical support services.
The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent
in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered
by the Company to its customers: lease receivables, loan receivables, and financed service contracts and other.
Effective in the second quarter of fiscal 2012, the Company combined its financing receivables into a single class
as the two prior classes, Established Markets and Growth Markets, now exhibit similar risk characteristics as
reflected by the Company’s historical losses. See Note 7.
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