HP 2008 Annual Report Download - page 49

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Our effective tax rate includes the impact of certain undistributed foreign earnings for which we
have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the United
States. We plan foreign earnings remittance amounts based on projected cash flow needs as well as the
working capital and long-term investment requirements of our foreign subsidiaries and our domestic
operations. Based on these assumptions, we estimate the amount we will distribute to the United States
and provide the U.S. federal taxes due on these amounts. Further, as a result of certain employment
actions and capital investments HP has undertaken, income from manufacturing activities in certain
countries is subject to reduced tax rates, and in some cases is wholly exempt from taxes, for fiscal years
through 2022. Material changes in our estimates of cash, working capital and long-term investment
requirements in the various jurisdictions in which we do business could impact our effective tax rate.
We are subject to income taxes in the United States and over sixty foreign countries, and we are
subject to routine corporate income tax audits in many of these jurisdictions. We believe that our tax
return positions are fully supported, but tax authorities are likely to challenge certain positions, which
may not be fully sustained. However, our income tax expense includes amounts intended to satisfy
income tax assessments that result from these challenges in accordance with Financial Accounting
Standards Board (‘‘FASB’’) Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109’’ (‘‘FIN 48’’). Determining the income tax expense for these
potential assessments and recording the related assets and liabilities requires management judgments
and estimates. We evaluate our uncertain tax positions in accordance with FIN 48. We believe that our
reserve for uncertain tax positions, including related interest, is adequate. The amounts ultimately paid
upon resolution of audits could be materially different from the amounts previously included in our
income tax expense and therefore could have a material impact on our tax provision, net income and
cash flows. Our reserve for uncertain tax positions is attributable primarily to uncertainties concerning
the tax treatment of our international operations, including the allocation of income among different
jurisdictions, and related interest. We review our reserves quarterly, and we may adjust such reserves
because of proposed assessments by tax authorities, changes in facts and circumstances, issuance of new
regulations or new case law, previously unavailable information obtained during the course of an
examination, negotiations between tax authorities of different countries concerning our transfer prices,
execution of Advanced Pricing Agreements, resolution with respect to individual audit issues, the
resolution of entire audits, or the expiration of statutes of limitations. In addition, our tax contingency
reserve includes certain amounts for potential tax assessments for pre-acquisition tax years of acquired
companies which, if released prior to the effective date of Statement of Financial Accounting Standards
No. 141 (revised 2007), ‘‘Business Combinations’’ (‘‘SFAS 141(R)’’), will impact the carrying value of
goodwill attributable to the acquired company.
Allowance for Doubtful Accounts
We determine our allowance for doubtful accounts using a combination of factors to ensure that
we have not overstated our trade and financing receivables balances due to uncollectibility. We
maintain an allowance for doubtful accounts for all customers based on a variety of factors, including
the use of third-party credit risk models that generate quantitative measures of default probabilities
based on market factors, the financial condition of customers, the length of time receivables are past
due, trends in overall weighted-average risk rating of the total portfolio, macroeconomic conditions,
significant one-time events and historical experience. Also, we record specific provisions for individual
accounts when we become aware of a customer’s inability to meet its financial obligations to us, such as
in the case of bankruptcy filings or deterioration in the customer’s operating results or financial
position. If circumstances related to customers change, we would further adjust our estimates of the
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