SanDisk 2005 Annual Report Download - page 109

We record estimated reductions to revenue or to deferred revenue for customer and distributor incentive
programs and offerings, including price protection, promotions, co-op advertising, and other volume-based
incentives and expected returns. Additionally, we have incentive programs that require us to estimate, based on
historical experience, the number of customers who will actually redeem the incentive. All sales incentive programs
are recorded as an offset to product revenues, deferred revenues or a charge to marketing expenses. In the past,
actual returns and rebates have not been significantly different from our estimates. However, actual returns and
rebates in any future period could differ from our estimates, which could impact the net revenue we report.
Inventories and Inventory Valuation. Inventories are stated at the lower of cost (first-in, first-out) or market.
Market value is based upon an estimated average selling price reduced by estimated costs of disposal. The
determination of market value involves numerous judgments including estimating average selling prices based
upon recent sales volumes, industry trends, existing customer orders, current contract prices, industry analysis of
supply and demand and seasonal factors. Should actual market conditions differ from our estimates, our future
results of operations could be materially affected. The valuation of inventory also requires us to estimate obsolete or
excess inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for
our products within specific time horizons, generally six to twelve months. To the extent our demand forecast for
specific products is less than our product on hand and our noncancelable orders, we could be required to record
additional inventory reserves, which would have a negative impact on our gross margin.
Accounting for Investments. We evaluate whether entities that we have invested in are variable interest
entities within the definition of the Financial Accounting Standards Board Interpretation No. 46, Accounting for
Variable Interest Entities. If those entities are variable interest entities, then we determine whether we are the
primary beneficiary of that entity by reference to our contractual and business arrangements with respect to residual
gains and residual losses on liquidation of that entity.
With respect to all equity investments, we review the degree of control that our investment and other
arrangements give us over the entity we have invested in and our business to confirm that these conclusions are
correct. Generally, after considering all factors, if we hold equity interests representing less than 20% of the
outstanding voting interests of an entity we invested in, we use the cost method of accounting. If we hold at least
20% but less than a majority of the outstanding voting interests of an entity we invested in, we use the equity method
of accounting.
We have the financial capability and the intent to hold our loans to the ventures with Toshiba until maturity and
accordingly those loans are carried at cost and their value in our financial statements is not adjusted to market value.
Deferred Tax Assets. We must make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and
liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial
statement purposes.
We must assess the likelihood that we will be able to recover our deferred tax assets. We consider historical
levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation allowance. If recovery is not likely, we must
increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate
will not ultimately be recoverable. We carried a valuation allowance on our deferred tax assets of $14.9 million and
$12.3 million at January 1, 2006 and January 2, 2005, respectively, based on our view that it is more likely than not
that we will not be able to take tax a benefit for unrealized capital losses on our investments in foundries.
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