HP 2008 Annual Report Download - page 97

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Concentrations of Credit Risk
Financial instruments that potentially subject HP to significant concentrations of credit risk consist
principally of cash and cash equivalents, investments, accounts receivable from trade customers and
from contract manufacturers, financing receivables and derivatives.
HP maintains cash and cash equivalents, short and long-term investments, derivatives and certain
other financial instruments with various financial institutions. These financial institutions are located in
many different geographical regions and HP’s policy is designed to limit exposure with any one
institution. As part of its cash and risk management processes, HP performs periodic evaluations of the
relative credit standing of the financial institutions. HP has not sustained material credit losses from
instruments held at financial institutions. HP utilizes forward contracts and other derivative contracts to
protect against the effects of foreign currency fluctuations. Such contracts involve the risk of
non-performance by the counterparty, which could result in a material loss.
HP sells a significant portion of its products through third-party distributors and resellers and, as a
result, maintains individually significant receivable balances with these parties. If the financial condition
or operations of these distributors and resellers deteriorate substantially, HP’s operating results could
be adversely affected. The ten largest distributor and reseller receivable balances collectively, which
were concentrated primarily in North America and Europe, represented approximately 18% of gross
accounts receivable at October 31, 2008 and 23% at October 31, 2007. No single customer accounts for
more than 10% of accounts receivable. Credit risk with respect to other accounts receivable and
financing receivables is generally diversified due to the large number of entities comprising HP’s
customer base and their dispersion across many different industries and geographical regions. HP
performs ongoing credit evaluations of the financial condition of its third-party distributors, resellers
and other customers and requires collateral, such as letters of credit and bank guarantees, in certain
circumstances. To ensure a receivable balance is not overstated due to uncollectibility, an allowance for
doubtful accounts is maintained as required under U.S. generally accepted accounting principles. The
past due or delinquency status of a receivable is based on the contractual payment terms of the
receivable. The need to write off a receivable balance depends on the age, size and a determination of
collectability of the receivable. HP generally has experienced longer accounts receivable collection
cycles in its emerging markets, in particular Asia Pacific and Latin America, compared to its United
States and European markets. In the event that accounts receivable collection cycles in emerging
markets significantly deteriorate or one or more of HP’s larger resellers or enterprise customers fail,
HP’s operating results could be adversely affected.
Other Concentration
HP obtains a significant number of components from single source suppliers due to technology,
availability, price, quality or other considerations. The loss of a single source supplier, the deterioration
of its relationship with a single source supplier, or any unilateral modification to the contractual terms
under which HP is supplied components by a single source supplier could adversely affect HP’s revenue
and gross margins.
Stock-Based Compensation
Stock-based compensation expense for all share-based payment awards granted after November 1,
2005 is determined based on the grant-date fair value estimated in accordance with the provisions of
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