SanDisk 2012 Annual Report Download - page 145

This is a TAB type table. Insert
conts here. Annual Report
Critical Accounting Policies & Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our
Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted
Accounting Principles, or GAAP.
Use of Estimates. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an ongoing basis, we evaluate our estimates, including, among others, those related to customer
programs and incentives, IP claims, product returns, inventories, valuation and impairment of marketable
securities and investments, impairments of goodwill and long-lived assets, income taxes, warranty obligations,
restructurings, contingencies, share-based compensation and litigation. We base our estimates on historical
experience and on other assumptions that we believe are reasonable under the circumstances, the results of which
form the basis for our judgments about the carrying values of assets and liabilities when those values are not
readily apparent from other sources. Estimates have historically approximated actual results. However, future
results will differ from these estimates under different assumptions and conditions.
Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. We recognize
revenues when the earnings process is complete, as evidenced by an agreement with the customer, there is
transfer of title and acceptance, if applicable, pricing is fixed or determinable and collectability is reasonably
assured. Revenue is generally recognized at the time of shipment for customers not eligible for price protection
and/or a right of return. Sales made to distributors and retailers are generally under agreements allowing price
protection and/or right of return and, therefore, the sales and related costs of these transactions are deferred until
the distributors or retailers sell the merchandise to their end customer, or the rights of return expire. At
December 30, 2012 and January 1, 2012, deferred income from sales to distributors and retailers was
$205 million and $162 million, respectively. Estimated sales returns are provided for as a reduction to product
revenues and deferred revenues and were not material for any period presented in our Consolidated Financial
Statements. Sales of standalone software products were not material for any period presented.
We record estimated reductions to revenues or to deferred revenues for customer and distributor incentive
programs and offerings, including price protection, promotions, co-op advertising, and other volume-based
incentives and expected returns. 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 and historical activity. The resolution of these
claims is generally within twelve months and 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. The estimated future demand is
compared to inventory levels to determine the amount, if any, of obsolete and excess inventory. The demand
forecast includes our estimates of market growth and our market share, various internal estimates and data from
certain external sources, and is based on assumptions that are consistent with the plans and estimates we are
using to manage our underlying business and short-term manufacturing plans. To the extent our demand forecast
for specific products is less than the combination of our product on-hand and our noncancelable orders from
suppliers, we could be required to record additional inventory reserves, which would have a negative impact on
our gross margin.
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