SanDisk 2013 Annual Report Download - page 145

disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including, among
others, those related to customer programs and incentives, product returns, allowance for doubtful
accounts, valuation of inventories, valuation and impairments of marketable securities and investments,
valuation and impairments of goodwill and long-lived assets, income taxes, warranty obligations,
restructurings, contingencies, share-based compensation, IP claims 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 revenue
when the earnings process is complete, as evidenced by an agreement with the customer, 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 or transfer of title 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 29, 2013 and December 30, 2012, deferred income
from sales to distributors and retailers was $254 million and $205 million, respectively. Estimated sales
returns are recorded as a reduction to revenue and deferred revenue 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 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. All sales incentive programs are recorded as an offset to
revenue or deferred revenue. 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 revenue or
deferred revenue. 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 appropriate 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.
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
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