SanDisk 2006 Annual Report Download - page 108

Notes to Consolidated Financial Statements
Note 1: Organization and Summary of Significant Accounting Policies
Organization and Nature of Operations. SanDisk Corporation (together with its subsidiaries, the Company)
was incorporated in Delaware on June 1, 1988. The Company designs, develops, markets and manufactures flash
storage card products used in a wide variety of consumer electronics products. The Company operates in one
segment, flash memory storage products.
Basis of Presentation. The Company’s fiscal year ends on the Sunday closest to December 31. Fiscal 2006
and fiscal 2005 each consisted of 52 weeks and fiscal 2004 consisted of 53 weeks.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. Minority
interest represents the minority shareholders’ proportionate share of the net assets and results of operations of our
majority-owned subsidiary. The consolidated financial statements also include the results of companies acquired by
the Company from the date of each acquisition. The Company completed two significant acquisitions, Matrix
Semiconductor, Inc., or Matrix, and msystems Ltd., or msystems, on January 13, 2006 and November 19, 2006,
respectively. See Note 10, “Business Acquisitions” for further details.
Reclassification. Share and equity amounts in the accompanying consolidated financial statements give
retroactive effect to a 2-for-1 stock split, in the form of a 100% stock dividend, effected on February 18, 2004. In
connection with the acquisition of msystems, in the fourth quarter of fiscal 2006, the Company revised its
methodology for classifying the amortization of acquired intangibles related to core developed technology from
operating expenses to cost of sales. The amortization related to core and developed technology associated with the
Matrix acquisition was not reclassified from operating expense to cost of sales and was approximately $3 million in
each of the first three quarters of fiscal 2006.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The estimates and judgments affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates
its estimates, including those related to customer programs and incentives, product returns, bad debts, inventories
and related impairment, investments, income taxes, warranty obligations, restructuring and contingencies, share-
based compensation and litigation. The Company bases estimates on historical experience and on other assump-
tions that its management believes are reasonable under the circumstances. These estimates form the basis for
making judgments about the carrying values of assets and liabilities when those values are not readily apparent from
other sources. Actual results could differ from these estimates.
Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. The Company recog-
nizes net revenues when the earnings process is complete, as evidenced by an agreement with the customer, transfer
of title and acceptance, if applicable, fixed or determinable pricing and reasonable assurance of realization. Sales
made to distributors and retailers are generally under agreements allowing price protection and/or a right of return
and, therefore, the sales and related costs of these transactions are deferred until the retailers or distributors sell-
through the merchandise to their end customer, or the rights of return expire. Estimated sales returns are provided
for as a reduction to product revenue and were not material for any period presented in the accompanying
consolidated financial statements. The cost of shipping products to customers is included in costs of product
revenues. The Company recognizes expenses related to sales commissions in the period in which they are earned.
Revenue from patent licensing arrangements is recognized when earned and estimable. The timing of revenue
recognition is dependent on the terms of each license agreement and on the timing of sales of licensed products. The
Company generally recognizes royalty revenue when it is reported to the Company by its licensees, which is
generally one quarter in arrears from the licensees’ sales. The Company recognizes license fee revenue on a straight-
line basis over the life of the license.
The cost of revenues associated with patent license and royalty revenues was insignificant for each of the three
years in the period ended December 31, 2006.
Annual Report
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