D-Link 2004 Annual Report Download - page 33

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5
D-LINK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
(7) Inventories
Inventories are stated at the lower of cost or market value. Except for DCI and DIL, D-Link and
its subsidiaries determine cost by using the weighted-average method. DCI and DIL determine
cost by using the first-in, first-out method (starting from November 2003, DCI changed to the
weighted-average method). The market value of raw materials is determined on the basis of
replacement cost, and the market values of finished goods and work in process are determined on
the basis of net realizable value.
(8) Long-term equity investments
Long-term equity investments in publicly traded companies whereby D-Link directly or
indirectly, owns less than 20 percent of the investee’ s voting shares and is not able to exercise
significant influence over the investee’ s operations and financial policies are accounted for by the
lower-of-cost-or-market method. However, if the shares of such long-term equity investments
are not traded publicly, they are accounted for by the cost method. If there is evidence indicating
that a decline in the value of such an investment is other than temporary, then the carrying
amount of the investment is reduced to reflect its net realizable value. The related loss is
recognized in the accompanying consolidated statements of income.
Long-term equity investments in which D-Link, directly or indirectly, owns between 20 percent
and 50 percent of the investee’ s voting shares, or less than 20 percent of the investee’ s voting
shares but is able to exercise significant influence over the investee’ s operations and financial
policies, are accounted for by the equity method. The difference between the acquisition cost
and the net equity of the investee as of the acquisition date is deferred and amortized from five to
ten years using the straight-line method, and the amortization is recorded as investment income
or loss in the accompanying consolidated statements of income.
If an investee company issues new shares and the D-Link and subsidiaries do not acquire new
shares in a proportion to its original ownership percentage, the equity in the investee’ s net assets
will be changed. The change in the equity interest shall be used to adjust the capital surplus and
long-term investments accounts.
For long-term equity investments in which D-Link owns less than 50% of an investee’ s voting
shares and the investees are unable to forward their audited financial statements in a timely
fashion, D-Link recognizes its share of the income or losses of the investee in the following year.
Such time lag in recording the investee’ s income or losses is consistently applied afterward.
All significant inter-company transaction gains or losses with investees accounted for under the
equity method are deferred. These gains or losses are recognized in the year that the gain or loss
is realized through a third-party transaction or over the remaining useful life of property, plant
and equipment.