SanDisk 2005 Annual Report Download - page 129

Foreign Currency. The Company determines the functional currency for its parent company and each of its
subsidiaries by reviewing the currencies in which their respective operating activities occur. Transaction gains and
losses arising from activities in other than the applicable functional currency are calculated using average exchange
rates for the applicable period and reported in net income as a non-operating item in each period. Monetary balance
sheet items denominated in a currency other than the applicable functional currency are translated using the
exchange rate in effect on the balance sheet date and are included in retained earnings. The Company evaluates its
foreign currency exposures and may enter into hedges or other risk mitigating arrangements in the future. Aggregate
foreign currency transaction gains (loss) recorded to net income were $(0.1) million, $1.8 million and $2.1 million,
in 2005, 2004 and 2003, respectively. See Note 2, “Accumulated Other Comprehensive Income (Loss).”
Cash Equivalents and Short-Term Investments. Cash equivalents consist of short-term, highly liquid
financial instruments with insignificant interest rate risk that are readily convertible to cash and have maturities
of three months or less from the date of purchase. Short-term investments consist of taxable commercial paper,
United States government agency obligations, corporate/municipal notes and bonds with high-credit quality, money
market preferred stock and auction rate preferred stock and have maturities greater than three months from the date
of purchase. Short-term investments also include the unrestricted portion of the Company’s investment in foundries
and investments for which trading restrictions expire within one year. The fair market value, based on quoted market
prices, of cash equivalents and short-term investments excluding the Company’s short-term investment in foundries
at January 1, 2006 and January 2, 2005 approximated their carrying value. Cost of securities sold is based on a
specific identification method.
In determining if and when a decline in market value below cost of these investments is other-than-temporary,
the Company evaluates the market conditions, offering prices, trends of earnings, price multiples and other key
measures. When such a decline in value is deemed to be other-than-temporary, the Company recognizes an
impairment loss in the current period operating results to the extent of the decline.
Property and Equipment. Property, plant and equipment are carried at cost less accumulated depreciation,
estimated residual value, if any, and amortization. Depreciation and amortization are computed using the straight-
line method over the estimated useful lives of the assets or the remaining lease term, whichever is shorter, ranging
from two to ten years.
Equity Investments. The Company accounts for investments in equity securities of other entities under the
cost method of accounting if investments in voting equity interests of the investee is less than 20%. The equity
method of accounting is used if its investment in voting stock is greater than 20% but less than a majority. In
considering the accounting method for investments less than 20%, the Company considers other factors such as its
ability to exercise significant influence over operating and financial policies of the investee. If certain factors are
present, the Company could account for investments for which it has less than a 20% ownership under the equity
method of accounting. Certain of the Company’s investments carry restrictions on immediate disposition. Invest-
ments in public companies with restrictions of less than one year are classified as available-for-sale and are adjusted
to their fair market value with unrealized gains and losses recorded as a component of accumulated other
comprehensive income. Investments in public companies with restrictions greater than one year are carried at cost.
Investments in public and non-public companies are reviewed on a quarterly basis to determine if their value has
been impaired and adjustments are recorded as necessary. Upon disposition of these investments, the specific
identification method is used to determine the cost basis in computing realized gains or losses. Declines in value that
are judged to be other than temporary are reported in other income (expense).
The Company evaluates its equity method investments to determine whether any investee is a variable interest
entity within the meaning of Financial Interpretation No. 46, Accounting for Variable Interest Entities, of the
Financial Accounting Standards Board. If the Company concludes that an investee is a variable interest entity, the
Company evaluates its interest in residual gains and residual losses of such investee to determine whether the
Company is the primary beneficiary of the investee. If the Company is the primary beneficiary of a variable interest
entity, the Company consolidates such entity and reflects the minority interest of other beneficiaries of that entity. If
the Company concludes that an investee is not a variable interest entity, the Company does not consolidate the
investee.
F-10
Notes to Consolidated Financial Statements — (Continued)