Ingram Micro 2006 Annual Report Download - page 47

Our Critical Accounting Policies and Estimates
The discussions and analyses of our consolidated financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in conformity with accounting principles generally
accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of significant contingent assets and liabilities at
the financial statement date, and reported amounts of revenue and expenses during the reporting period. On an
ongoing basis, we review and evaluate our estimates and assumptions, including, but not limited to, those that relate
to accounts receivable; vendor programs; inventories; goodwill, intangible and other long-lived assets; income
taxes; and contingencies and litigation. Our estimates are based on our historical experience and a variety of other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for
making our judgment about the carrying values of assets and liabilities that are not readily available from other
sources. Although we believe our estimates, judgments and assumptions are appropriate and reasonable based upon
available information, these assessments are subject to a wide range of sensitivity, therefore, actual results could
differ from these estimates.
We believe the following critical accounting policies are affected by our judgments, estimates and/or
assumptions used in the preparation of our consolidated financial statements.
•Accounts Receivable — We provide allowances for doubtful accounts on our accounts receivable for
estimated losses resulting from the inability of our customers to make required payments. Changes in the
financial condition of our customers or other unanticipated events, which may affect their ability to make
payments, could result in charges for additional allowances exceeding our expectations. Our estimates are
influenced by the following considerations: the large number of customers and their dispersion across wide
geographic areas; the fact that no single customer accounts for 10% or more of our net sales; a continuing
credit evaluation of our customers’ financial condition; aging of receivables, individually and in the
aggregate; credit insurance coverage; the value and adequacy of collateral received from our customers in
certain circumstances; and our historical loss experience.
•Vendor Programs — We receive funds from vendors for price protection, product rebates, marketing/
promotion, infrastructure reimbursement and meet-competition programs, which are recorded as adjust-
ments to product costs, revenue, or SG&A expenses according to the nature of the program. Some of these
programs may extend over one or more quarterly reporting periods. We accrue rebates or other vendor
incentives as earned based on sales of qualifying products or as services are provided in accordance with the
terms of the related program. Actual rebates may vary based on volume or other sales achievement levels,
which could result in an increase or reduction in the estimated amounts previously accrued. We also provide
reserves for receivables on vendor programs for estimated losses resulting from vendors’ inability to pay or
rejections of claims by vendors.
•Inventories — Our inventory levels are based on our projections of future demand and market conditions.
Any sudden decline in demand and/or rapid product improvements and technological changes could cause
us to have excess and/or obsolete inventories. On an ongoing basis, we review for estimated excess or
obsolete inventories and write down our inventories to their estimated net realizable value based upon our
forecasts of future demand and market conditions. If actual market conditions are less favorable than our
forecasts, additional inventory write-downs may be required. Our estimates are influenced by the following
considerations: protection from loss in value of inventory under our vendor agreements, our ability to return
to vendors only a certain percentage of our purchases as contractually stipulated, aging of inventories, a
sudden decline in demand due to an economic downturn, and rapid product improvements and technological
changes.
•Goodwill, Intangible Assets and Other Long-Lived Assets — Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets” eliminated the amortization of goodwill but requires that
goodwill be reviewed at least annually for potential impairment. In the fourth quarters of 2006, 2005 and
2004, we performed our annual impairment tests of goodwill in North America, Europe and Asia-Pacific.
There is no goodwill in Latin America. The valuation methodologies included, but were not limited to,
estimated net present value of the projected future cash flows of these reporting units. In connection with
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