SanDisk 2004 Annual Report Download - page 57

Table of Contents
Notes to Consolidated Financial Statements — (Continued)
to determine whether the Company is the primary beneficiary of the investee. If the Company were the primary beneficiary of a
variable interest entity, the Company would consolidate such entity and reflect the minority interest of other beneficiaries of that
entity.
Inventories and Inventory Valuation. Inventories are stated at the lower of cost (approximating first−in, first−out) or market.
Market value is based upon an estimated average selling price reduced by estimated costs of disposal. Reductions in inventory
valuation are included in costs of product revenues in the accompanying consolidated income statements. Inventory impairment
charges permanently establish a new cost basis and are not reversed even if circumstances later suggest that increased carrying
amounts are recoverable.
The Company reduces the carrying value of its inventory to a new basis for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand
and market conditions, including assumptions about changes in average selling prices. If actual market conditions are less favorable
than those projected by management, additional reductions in inventory valuation may be required.
The Company’s finished goods inventory includes consigned inventory held at customer locations as well as at third party
fulfillment centers and subcontractors.
Intangible Assets. The excess of purchase price over the fair market value of acquired tangible assets, net of liabilities, is recorded
as identifiable intangible assets or to the extent there are not sufficient identifiable intangible assets, as goodwill. The Company tests
its intangible assets for impairment if indicators of impairment exist, and it would then reduce the basis of the intangible asset
accordingly. Identifiable intangible assets are amortized on a straight−line basis over their estimated useful life, generally 3−5 years.
Goodwill is evaluated for impairment annually by reference to the lowest level reporting unit to which the goodwill relates. The
Company has one reporting unit based on the lowest level profit and loss summaries reviewed by the Company’s chief decision
maker. In 2004, the Company’s intangible asset balance increased as a result of goodwill and other intangibles acquired as part of an
immaterial business combination.
Other long−lived assets. Intangible assets with definite useful lives and other long−lived assets are tested for impairment in
accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment of Disposal of Long−Lived Assets.
The Company assesses the carrying value of long−lived assets, whenever events or changes in circumstances indicate that the carrying
value of these long−lived assets may not be recoverable. Factors the Company considers important which could result in an
impairment review include (1) significant under−performance relative to the expected historical or projected future operating results,
(2) significant changes in the manner of use of assets, (3) significant negative industry or economic trends and (4) significant changes
in the Company’s market capitalization relative to net book value. Any changes in key assumptions about the business or prospects, or
changes in market conditions, could result in an impairment charge and such a charge could have a material adverse effect on the
Company’s consolidated results of operations. When impairments are assessed, the Company would record charges to reduce goodwill
or other long−lived assets based on the amount by which the carrying amounts of these assets exceed their fair values.
Warranties. The majority of the Company’s products are warrantied for one to five years. A provision for estimated future cost of
performing warranty obligations is recorded at the time of customer invoice. The Company’s warranty obligation is affected by
product failure rates and repair or replacement costs incurred in supporting a product failure. Should actual product failure rates, or
repair or replacement costs differ from the Company’s estimates, increases or decreases to its warranty liability would be required.
Advertising Expenses. Marketing co−op development programs, where the Company receives, or will receive, an identifiable
benefit (goods or services) in exchange for the amount paid to its customer and the Company can reasonably estimate the fair value of
the benefit it receives for the customer incentive payment, are classified, when granted, as marketing expense, and costs of this type
not meeting this criteria are classified as a reduction to product revenue. Any other advertising expenses not meeting these conditions
are expensed
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