Motorola 2011 Annual Report Download - page 56

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for the undelivered elements, we use the residual method to recognize revenue when the fair value of all undelivered
elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement consideration is allocated to the delivered elements and is recognized as
revenue.
Changes in cost estimates and the fair values of certain deliverables could negatively impact our operating
results. In addition, unforeseen conditions could arise over the contract term that may have a significant impact on
operating results.
Inventory Valuation
We record valuation reserves on our inventory for estimated excess or obsolescence. 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 performs an analysis of the
underlying inventory to identify reserves needed for excess and obsolescence. We use our best judgment to estimate
appropriate reserves based on this analysis. In addition, we adjust the carrying value of inventory if the current
market value of that inventory is below our cost.
At December 31, 2011 and 2010, Inventories consisted of the following:
December 31 2011 2010
Finished goods $ 398 $ 386
Work-in-process and production materials 284 292
682 678
Less inventory reserves (170) (157)
$ 512 $ 521
We balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our
customers against the risk of inventory obsolescence due to rapidly changing technology and customer requirements.
As reflected above, our inventory reserves represented 25% of the gross inventory balance at December 31, 2011,
compared to 23% of the gross inventory balance at December 31, 2010. We have inventory reserves for excess
inventory, 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 future demand or market conditions are less favorable than those projected by management, additional
inventory writedowns may be required.
Income Taxes
Our effective tax rate is based on pre-tax income and the tax rates applicable to that income in the various
jurisdictions in which we operate. An estimated effective tax rate for a year is applied to our quarterly operating
results. In the event that there is a significant unusual or discrete item recognized, or expected to be recognized, in
our 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. We consider the resolution of prior-year tax matters to be such items.
Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We
establish reserves when it is more-likely-than-not that we will not realize the full tax benefit of the position. We
adjust 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 we have already recorded the tax benefit in the consolidated financial statements. Deferred tax liabilities
generally represent tax expense recognized in the consolidated financial statements for which payment has been
deferred or expense for which we have already taken a deduction on an income tax return, but has not yet been
recognized in the consolidated financial statements.