SanDisk 2006 Annual Report Download - page 110

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 twenty years.
Variable Interest Entities. The Company evaluates its equity method investments to determine whether any
investee is a variable interest entity within the meaning of Financial Interpretation No. 46R, or FIN 46R, 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.
Equity Investments. The Company accounts for investments in equity securities of other entities, including
variable interest entities that are not consolidated, 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. Investments 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).
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. Should actual
market conditions differ from the Company’s estimates, the Company’s future results of operations could be
materially affected. Reductions in inventory valuation are included in costs of product revenues in the accom-
panying consolidated income statements. The Company’s inventory impairment charges permanently establish a
new cost basis and are not subsequently reversed to income even if circumstances later suggest that increased
carrying amounts are recoverable. Rather these amounts are reversed into income only if, as and when the inventory
is sold.
The Company reduces the carrying value of its inventory to a new basis for estimated obsolescence or
unmarketable inventory by an amount 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 manage-
ment, 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.
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, or SFAS 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,
Annual Report
F-11
Notes to Consolidated Financial Statements — (Continued)