Netgear 2012 Annual Report Download - page 41

Table of Contents
In addition to warranty-
related returns, certain distributors and retailers generally have the right to return product for stock rotation purposes.
Upon shipment of the product, we reduce revenue for an estimate of potential future stock rotation returns related to the current period product
revenue. We analyze historical returns, channel inventory levels, current economic trends and changes in customer demand for our products when
evaluating the adequacy of the allowance for sales returns, namely stock rotation returns. Our estimated allowances for returns due to stock rotation
can vary from actual results and we may have to record additional revenue reductions, which could materially impact our financial position and
results of operations.
We accrue for sales incentives as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair
value of the identifiable benefit received; otherwise, it is recorded as a reduction of revenues. Our estimated provisions for sales incentives can vary
from actual results and we may have to record additional expenses or additional revenue reductions dependent on the classification of the sales
incentive.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.
We regularly perform credit evaluations of our customers’
financial condition and consider factors such as historical experience, credit quality, age of
the accounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a customer’
s ability to pay. The
allowance for doubtful accounts is reviewed quarterly and adjusted if necessary based on our assessments of our customers’
ability to pay. If the
financial condition of our customers should deteriorate or if actual defaults are higher than our historical experience, additional allowances may be
required, which could have an adverse impact on operating expenses.
Valuation of Inventory
We value our inventory at the lower of cost or market, cost being determined using the first-in, first-
out method. We continually assess the
value of our inventory and will periodically write down its value for estimated excess and obsolete inventory based upon assumptions about future
demand and market conditions. On a quarterly basis, we review inventory quantities on hand and on order under non-
cancelable purchase
commitments, including consignment inventory, in comparison to our estimated forecast of product demand for the next nine months to determine
what inventory, if any, are not saleable. Our analysis is based on the demand forecast but takes into account market conditions, product development
plans, product life expectancy and other factors. Based on this analysis, we write down the affected inventory value for estimated excess and
obsolescence charges. At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis. As demonstrated during prior years, demand for our
products can fluctuate significantly. If actual demand is lower than our forecasted demand and we fail to reduce our manufacturing accordingly, we
could be required to write down additional inventory, which would have a negative effect on our gross profit.
Goodwill
Goodwill represents the purchase price over estimated fair value of net assets of businesses acquired in a business combination. Goodwill
acquired in a business combination is not amortized, but instead tested for impairment at least annually during the fourth quarter. Should certain
events or indicators of impairment occur between annual
impairment tests, we will perform the impairment test as those events or indicators occur.
Examples of such events or circumstances include the following: a significant decline in the our expected future cash flows; a sustained, significant
decline in our stock price and market capitalization; a significant adverse change in the business climate; and slower growth rates.
Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely
than not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying value. The qualitative assessment
considers the following factors: macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance,
events affecting the reporting units, and changes in our share price. If the reporting unit does not pass the qualitative assessment, then we estimate our
fair value and compare the fair value with the carrying value of our net assets. If the fair value is greater than the carrying value of our net assets, then
no impairment results. If the fair value is less than our carrying value, then we would determine the fair value of the goodwill by comparing the
implied fair value to the carrying value of the goodwill in the same manner as if we were being acquired in a business combination. Specifically, we
would allocate the fair value to all of our assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that would
calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge would be
recorded to earnings in the Consolidated Statements of Operations.
In the fourth fiscal quarter of 2012, we completed the annual impairment test of goodwill. We assessed whether it was more likely than not (that
is, a likelihood of more than 50%) that each reporting unit’s fair value was less than its carrying amount
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