Plantronics 2011 Annual Report Download - page 51

Once inventory is written down, subsequent changes in facts and circumstances do not result in the restoration to the original cost
or an increase in the new, lower-cost basis.
Product Warranty Obligations
We provide for product warranties in accordance with the underlying contractual terms given to the customer or end user of the
product. The contractual terms vary depending upon the geographic region in which the customer is located, the type of product
sold, and other conditions, which affect or limit the customer’s rights to return product under warranty. Where specific warranty
return rights are given to customers, we accrue for the estimated cost of those warranties at the time revenue is
recognized. Generally, warranties start at the delivery date to the customer or end user and continue for one or two years. Where
specific warranty return rights are not given to the customers but where the customers are granted limited rights of return or
discounts in lieu of warranty, we record these rights of return or discounts as adjustments to revenue. Factors that affect the
warranty obligation include sales terms, which obligate us to provide warranty, product failure rates, estimated return rates, material
usage, and service delivery costs incurred in correcting product failures. We assess the adequacy of the recorded warranty obligation
quarterly and make adjustments to the obligation based on actual experience and changes in estimated future return rates. If our
estimates are less than the actual costs of providing warranty related services, we could be required to record additional warranty
reserves, which would have a negative impact on our gross profit.
Fair Value
Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in
pricing an asset or liability. As the basis for considering such assumptions, a three-tier value hierarchy prioritizes the inputs used
in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than
the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which
there is little or no market data, which require us to develop our own assumptions. This hierarchy requires us to use observable
market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis,
we measure certain financial assets and liabilities at fair value, including our marketable securities and foreign currency contracts.
Our cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued
using inputs such as quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of
price transparency. The types of instruments valued based on quoted market prices in active markets include cash, money market
funds and U.S. Treasury Bills. Such instruments are generally classified within Level 1 of the fair value hierarchy.
The types of instruments valued based on other observable inputs include Government Agency Securities, Commercial Paper,
U.S. Corporate Bonds and CDs. Such instruments are generally classified within Level 2 of the fair value hierarchy.
The principal market where we execute our foreign currency contracts is the retail market in an over-the-counter environment
with a relatively high level of price transparency. Our counterparties are large money center banks. Our foreign currency contracts
valuation inputs are based on quoted prices and quoted pricing intervals from public data sources. These contracts are typically
classified within Level 2 of the fair value hierarchy.
Income Taxes
We are subject to income taxes both in the U.S. as well as in several foreign jurisdictions. We must make certain estimates and
judgments in determining income tax expense for the financial statements. These estimates occur in the calculation of tax benefits
and deductions, tax credits, and tax assets and liabilities which are generated from differences in the timing of when items are
recognized for book purposes and when they are recognized for tax purposes.
The impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more-
likely-than-not to be sustained. An uncertain income tax position will not be recognized unless it has a greater than 50% likelihood
of being sustained. We continue to follow the practice of recognizing interest and penalties related to income tax matters as a part
of the provision for income taxes.
We account for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary
differences between book and tax bases of assets and liabilities to be recognized as deferred tax assets and liabilities. Valuation
allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not
that the benefit of such assets will not be realized.
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