SanDisk 2008 Annual Report Download - page 49

We record estimated reductions to revenue or to deferred 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, we have incentive programs that require us 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. In calculating the value of sales
incentive programs, actual and estimated activity is used based upon reported weekly sell-through data from our
customers. The timing and resolution of these claims could materially impact product revenues or deferred
revenues. In addition, actual returns and rebates in any future period could differ from our estimates, which could
impact the revenue we report.
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.
The determination of market value involves numerous judgments including estimating average selling prices
based upon recent sales, industry trends, existing customer orders, current contract prices, industry analysis of
supply and demand and seasonal factors. Should actual market conditions differ from our estimates, our future
results of operations could be materially affected. The valuation of inventory also requires us to estimate obsolete
or excess inventory. The determination of obsolete or excess inventory requires us to estimate the future demand
for our products within specific time horizons, generally six to twelve months. To the extent our demand forecast
for specific products is less than both our product on-hand and on noncancelable orders, we could be required to
record additional inventory reserves, which would have a negative impact on our gross margin.
Accounting for Variable Interest Entities. We evaluate whether entities in which we have invested are
variable interest entities within the definition of the FASB Interpretation No. 46R, or FIN 46R, Accounting for
Variable Interest Entities. If those entities are variable interest entities, or VIEs, we then determine whether we
are the primary beneficiary of that entity by reference to our contractual and business arrangements with respect
to expected gains and losses. The assessment of the primary beneficiary includes an analysis of the forecast and
contractual stipulations of the VIE. Determining whether we would consolidate or apply the equity method to a
particular VIE requires review of the VIE’s forecast, which involves analysis of company specific data, industry
data, known trends and uncertainties, which are inherently subjective. Consolidating a VIE under FIN 46R rather
than using the equity method can materially impact revenue, gross margin and operating income trends.
Deferred Tax Assets. We must make certain estimates in determining income tax expense for financial
statement purposes. These estimates occur in the calculation of certain tax assets and liabilities, which arise from
differences in the timing of recognition of revenue and expense for tax and financial statement purposes. In
determining the need for and amount of our valuation allowance, we assess the likelihood that we will be able to
recover our deferred tax assets using historical levels of income, estimates of future income and tax planning
strategies. We have incurred cumulative losses in recent years and determined in the fourth quarter of fiscal year
2008, based on all available evidence, that there was substantial uncertainty as to the realizability of the deferred
tax assets in future periods and accordingly we recorded a valuation allowance against a significant portion of
our U.S. and certain foreign net deferred tax assets.
Our estimates for tax uncertainties require substantial judgment based upon the period of occurrence,
complexity of the matter, available federal tax case law, interpretation of foreign laws and regulations and other
estimates. There is no assurance that domestic or international tax authorities will agree with the tax positions we
have taken which could materially impact future results.
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