Crucial 2012 Annual Report Download - page 42

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Income Taxes: We are required to estimate our provision for income taxes and amounts ultimately payable or recoverable
in numerous tax jurisdictions around the world. These estimates involve judgment and interpretations of regulations and are
inherently complex. Resolution of income tax treatments in individual jurisdictions may not be known for many years after
completion of any fiscal year. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis
in accordance with U.S. GAAP, which requires the assessment of our performance and other relevant factors. Realization of
deferred tax assets is dependent on our ability to generate future taxable income.
Inventories: Inventories are stated at the lower of average cost or market value. Cost includes labor, material and
overhead costs, including product and process technology costs. Determining market value of inventories involves numerous
judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in
work in process inventories. To project average selling prices and sales volumes, we review recent sales volumes, existing
customer orders, current contract prices, industry analyses of supply and demand, seasonal factors, general economic trends
and other information. When these analyses reflect estimated market values below our manufacturing costs, we record a charge
to cost of goods sold in advance of when the inventory is actually sold. Differences in forecasted average selling prices used in
calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of product
inventories and accordingly the amount of write-down recorded. For example, a 5% variance in the estimated selling prices
would have changed the estimated market value of our memory inventory by approximately $129 million as of August 30,
2012. Due to the volatile nature of the semiconductor memory industry, actual selling prices and volumes often vary
significantly from projected prices and volumes and, as a result, the timing of when product costs are charged to operations can
vary significantly.
U.S. GAAP provides for products to be grouped into categories in order to compare costs to market values. The amount of
any inventory write-down can vary significantly depending on the determination of inventory categories. Our inventories have
been generally categorized as memory (primarily DRAM, NAND Flash and NOR Flash) and imaging products. The major
characteristics we consider in determining inventory categories are product type and markets.
Property, Plant and Equipment: We review the carrying value of property, plant and equipment for impairment when
events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the
estimated future cash flows expected to result from its use and/or disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value
exceeds the estimated fair value of the assets. The estimation of future cash flows involves numerous assumptions which
require judgment by us, including, but not limited to, future use of the assets for our operations versus sale or disposal of the
assets, future selling prices for our products and future production and sales volumes. In addition, judgment is required in
determining the groups of assets for which impairment tests are separately performed.
Research and Development: Costs related to the conceptual formulation and design of products and processes are
expensed as R&D as incurred. Determining when product development is complete requires judgment by us. We deem
development of a product complete once the product has been thoroughly reviewed and tested for performance and
reliability. Subsequent to product qualification, product costs are valued in inventory.
Stock-based Compensation: Stock-based compensation is estimated at the grant date based on the fair-value of the award
and is recognized as expense using the straight-line amortization method over the requisite service period. For performance-
based stock awards, the expense recognized is dependent on the probability of the performance measure being achieved. We
utilize forecasts of future performance to assess these probabilities and this assessment requires considerable judgment.
Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires
considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop these
estimates based on historical data and market information which can change significantly over time. A small change in the
estimates used can result in a relatively large change in the estimated valuation. We use the Black-Scholes option valuation
model to value employee stock awards. We estimate stock price volatility based on an average of its historical volatility and
the implied volatility derived from traded options on our stock.