SanDisk 2004 Annual Report Download - page 55

Table of Contents
Notes to Consolidated Financial Statements — (Continued)
with license and royalty revenues was insignificant for each of the three years in the period ended January 2, 2005.
The Company records reductions to revenue and trade−accounts receivable for customer programs and incentive offerings,
including promotions and other volume−based incentives based upon management’s estimates of these obligations. Marketing
development programs, when granted, are recorded as a reduction to revenue or as an addition to marketing expense if the Company
receives a separable identifiable benefit (like advertising placement) whose fair value is reasonably estimable from its customer.
Share Based Compensation. The Company accounts for share based compensation using the intrinsic value method under
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based Compensation, as amended by
Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock Based Compensation — Transition and
Disclosure. See Note 3 for detailed assumptions used by the Company to compute the fair value of share−based awards for purposes
of pro forma under SFAS 123.
Had compensation expense been determined based on the fair value at the grant dates, with amortization of the deferred stock
based compensation using the straight−line method over the vesting periods of the applicable options, the Company’s pro forma net
income and net income per share would have been as follows (in thousands, except per share amounts):
Years Ended
January 2, December 28, December 29,
2005 2003 2002
Net income as reported $ 266,616 $ 168,859 $ 36,240
Fair value method expense, net of related tax $ (39,550) $ (29,793) $ (22,990)
Pro forma net income $ 227,066 $ 139,066 $ 13,250
Pro forma basic income per share $ 1.38 $ 0.96 $ 0.10
Basic income per share, as reported $ 1.63 $ 1.17 $ 0.26
Pro forma diluted income (loss) per share $ 1.23 $ 0.84 $ 0.10
Diluted income (loss) per share, as reported $ 1.44 $ 1.02 $ 0.25
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable include amounts owed by geographically
dispersed distributors, retailers, and OEM customers. No collateral is required. Provisions are provided for sales returns and credit
losses.
The Company evaluates the collectibility of its accounts receivable based on a combination of factors. If the Company is aware of
a specific customer’s inability to meet its financial obligations to the Company (e.g., bankruptcy filings, substantial down−grading of
credit ratings), the Company provides a specific allowance for credit losses to reduce the net recognized receivable to the amount
management reasonably believes will be collected. For all other customers, the Company provides allowances for credit losses based
on the length of time the receivables are past due based on the Company’s historical experience. Accounts receivable are aged based
on the applicable contractual due date. All accounts or portions thereof that are deemed to be uncollectible are written off through a
charge to the allowance and a credit to accounts receivable. If circumstances change (i.e., higher than expected defaults or an
unexpected material adverse change in a major customer’s ability to meet its financial obligations to the Company), the Company’s
estimates of the recoverability of amounts due could be reduced by a material amount.
Deferred Taxes. The Company provides a valuation allowance against deferred tax assets if it is more likely than not that such an
amount will not be realized. The portion of the valuation allowance, associated with unrealized capital loss on investments in
foundries is reflected in accumulated other comprehensive income.
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