Motorola 2007 Annual Report Download - page 73

Inventory Valuation Reserves
The Company records valuation reserves on its inventory for estimated obsolescence or non-marketability. The
amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value
based upon assumptions about future demand and market conditions. On a quarterly basis, management in each
segment performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence
and, for the remaining inventory, assesses the net realizable value. Management uses its best judgment to estimate
appropriate reserves based on this analysis.
Inventories consisted of the following:
December 31 2007 2006
Finished goods $1,737 $1,796
Work-in-process and production materials 1,470 1,782
3,207 3,578
Less inventory reserves (371) (416)
$2,836 $3,162
The Company balances the need to maintain strategic inventory levels to ensure competitive delivery
performance to its customers against the risk of inventory obsolescence due to rapidly changing technology and
customer requirements. As reflected above, the Company’s inventory reserves represented 12% of the gross
inventory balance at both December 31, 2007 and 2006. The Company has inventory reserves for pending
cancellations of product lines due to technology changes, long-life cycle products, lifetime buys at the end of
supplier production runs, business exits, and a shift of production to outsourcing.
If actual future demand or market conditions are less favorable than those projected by management,
additional inventory writedowns may be required. Likewise, as with other reserves based on management’s
judgment, if the reserve is no longer needed, amounts are reversed into income. There were no significant reversals
into income of this type in the periods presented.
Taxes on Income
The Company’s effective tax rate is based on pre-tax income and the tax rates applicable to that income in the
various jurisdictions in which the Company operates. An estimated effective tax rate for a year is applied to the
Company’s quarterly operating results. In the event that there is a significant unusual or discrete item recognized,
or expected to be recognized, in the Company’s quarterly operating results, the tax attributable to that item would
be separately calculated and recorded at the same time as the unusual or discrete item. The Company considers the
resolution of prior-year tax matters to be such items. Significant judgment is required in determining the
Company’s effective tax rate and in evaluating its tax positions. The Company establishes reserves when it is more
likely than not that the Company will not realize the full tax benefit of the position. The Company adjusts these
reserves in light of changing facts and circumstances.
Tax regulations may require items of income and expense to be included in a tax return in different periods
than the items are reflected in the consolidated financial statements. As a result, the effective tax rate reflected in
the consolidated financial statements may be different than the tax rate reported in the income tax return. Some of
these differences are permanent, such as expenses that are not deductible on the tax return, and some are
temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and
liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax
return in future years for which the Company has already recorded the tax benefit in the consolidated financial
statements. The Company establishes valuation allowances for its deferred tax assets when it is more likely than
not that the amount of expected future taxable income will not support the use of the deduction or credit.
Deferred tax liabilities generally represent tax expense recognized in the consolidated financial statements for
which payment has been deferred or expense for which the Company has already taken a deduction on an income
tax return, but has not yet recognized as expense in the consolidated financial statements.
Valuation of Sigma Fund, Investments and Long-Lived Assets
The Company assesses the impairment of its Sigma Fund and investment portfolios and long-lived assets,
including identifiable property, plant and equipment and intangible assets, whenever events or changes in
65
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS