Dish Network 2006 Annual Report Download - page 72

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS – Continued
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measures intended to make signal theft of our programming more difficult. During 2005, we completed the
replacement of our smart cards. While the smart card replacement did not fully secure our system, we
continue to implement software patches and other security measures to help protect our service. There can
be no assurance that our security measures will be effective in reducing theft of our programming signals.
As of December 31, 2006, we did not have any accrual for future smart card replacement. At the time, if
ever, that we determine existing smart cards will be replaced again, we would accrue a liability for the
estimated cost to replace those cards in receivers sold to and owned by subscribers. That cost estimate
would be based on the number of cards expected to be replaced, taking into account a number of variables,
including the cost of the cards and historical subscriber churn trends. Changes in, among other things, the
timing of the replacement plan could result in increases or decreases in the smart card replacement reserve.
With respect to receivers we lease, we would record the expenses of replacement as incurred.
• Allowance for doubtful accounts. Management estimates the amount of required allowances for the potential
non-collectibility of accounts receivable based upon past collection experience and consideration of other
relevant factors. However, past experience may not be indicative of future collections and therefore additional
charges could be incurred in the future to reflect differences between estimated and actual collections.
• Inventory reserve. Management estimates the amount of reserve required for potential obsolete inventory
based upon past experience, the introduction of new technology and consideration of other relevant factors.
However, past experience may not be indicative of future reserve requirements and therefore additional
charges could be incurred in the future to reflect differences between estimated and actual reserve
requirements.
• Stock- based compensation. We account for stock–based compensation in accordance with the fair value
recognition provisions of SFAS 123R. We use the Black-Scholes option pricing model, which requires the
input of subjective assumptions. These assumptions include, among other things, estimating the length of
time employees will retain their vested stock options before exercising them (expected term); the estimated
volatility of our common stock price over the expected term (volatility), and the number of options that will
ultimately not complete their vesting requirements (forfeitures), see Note 2 in the Notes to the Consolidated
Financial Statements in Item 15 of this Annual Report on Form 10-K. Changes in these assumptions can
materially affect the estimate of fair value of stock-based compensation.
• Income taxes. Our income tax policy is to record the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards. We follow the guidelines set forth in Statement
of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”) regarding the
recoverability of any tax assets recorded on the balance sheet and provide any necessary valuation allowances
as required. Determining necessary valuation allowances requires us to make assessments about the timing of
future events, including the probability of expected future taxable income and available tax planning
opportunities. In accordance with SFAS 109, we periodically evaluate our need for a valuation allowance
based on both historical evidence, including trends, and future expectations in each reporting period. Future
performance could have a significant effect on the realization of tax benefits, or reversals of valuation
allowances, as reported in our results of operations.
• Contingent liabilities. A significant amount of management judgment is required in determining when, or if,
an accrual should be recorded for a contingency and the amount of such accrual. Estimates generally are
developed in consultation with outside counsel and are based on an analysis of potential outcomes. Due to the
uncertainty of determining the likelihood of a future event occurring and the potential financial statement
impact of such an event, it is possible that upon further development or resolution of a contingency matter, a
charge could be recorded in a future period that would be material to our consolidated results of operations
and financial position.