SanDisk 2007 Annual Report Download - page 105

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.
In July 2006 the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109. FIN 48 provides
detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions
recognized in an enterprise’s financial statements in accordance with SFAS 109. Income tax positions must meet a
more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in
subsequent periods. The Company adopted FIN 48 effective January 1, 2007 and the provisions of FIN 48 have been
applied to all income tax positions commencing from that date. The Company recognizes interest and penalties
related to unrecognized tax benefits in income tax expense. The cumulative effect of applying the provisions of
FIN 48 has been reported as an adjustment to the opening balance of our retained earnings as of January 1, 2007.
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. Non-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 any gains and losses are included in cumulative translation
adjustment. The Company continuously evaluates its foreign currency exposures and may continue to enter into
hedges or other risk mitigating arrangements in the future. Aggregate gross foreign currency transaction gain (loss)
prior to corresponding foreign exchange hedge offset recorded to net income was $15.6 million, ($2.5) million and
($5.1) million in fiscal years 2007, 2006 and 2005, respectively.
Cash Equivalents, Short 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 and long-term fixed income investments consist of commercial
paper, United States (“U.S.”) government and agency obligations, corporate/municipal notes and bonds, auction
rate securities and variable rate demand notes, all with high-credit quality. Both short and long-term investments
also include investments in certain equity securities. The fair market value, based on quoted market prices, of cash
equivalents, short and long-term investments at December 30, 2007 approximated their carrying value. Cost of
securities sold is based on a first-in, first-out method.
In determining if and when a decline in market value below cost of these investments is other-than-temporary,
the Company evaluates both quantitative and qualitative information including 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-9
Notes to Consolidated Financial Statements — (Continued)