SanDisk 2006 Annual Report Download - page 109

The Company records estimated reductions of 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, the Company has incentive programs that require it 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 or deferred revenues. Marketing development programs are either
recorded as a reduction to revenue in compliance with Emerging Issues Task Force No. 01-9, or EITF 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).
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 estimates the collectibility of its accounts receivable based on a combination of factors. In
circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to the
Company (e.g., bankruptcy filings or substantial down-grading of credit ratings), the Company provides allowance
for bad debts against amounts due to reduce the net recognized receivable to the amount it reasonably believes will
be collected.
Income Taxes. The Company accounts for income taxes using an asset and liability approach, which requires
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
recognized in the Company’s consolidated financial statements, but have not been reflected in the Company’s
taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable
value. Therefore, the Company provides a valuation allowance to the extent that the Company does not believe it is
more likely than not that it will generate sufficient taxable income in future periods to realize the benefit of its
deferred tax assets.
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 other comprehensive income. The Company
continuously 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
$3.4 million, $(0.1) million and $1.8 million in fiscal 2006, 2005 and 2004, respectively.
Cash Equivalents, and Short-Term and Long-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 commercial paper,
United States government agency obligations, corporate/municipal notes and bonds with high-credit quality,
auction rate certificates and auction rate preferred stock, and have maturities greater than three months and no more
than one year 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. Long-
term investments consist of U.S. Treasury notes, corporate bonds, government agency bonds and tax-advantaged
municipal bonds with remaining maturities greater than one year. The fair market value, based on quoted market
prices, of cash equivalents, short-term and long-term investments excluding the Company’s short-term investment
in foundries at December 31, 2006 and January 1, 2006 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.
F-10
Notes to Consolidated Financial Statements — (Continued)