Texas Instruments 2007 Annual Report Download - page 14

12 TEXAS INSTRUMENTS 2007 ANNUAL REPORT
The preparation of financial statements requires the use of estimates from which final results may vary.
Foreign Currency: The functional currency for our non-U.S. subsidiaries is the U.S. dollar. Accounts recorded in currencies other than the
U.S. dollar are remeasured into the functional currency. Current assets (except inventories), deferred income taxes, other assets, current
liabilities and long-term liabilities are remeasured at exchange rates in effect at the end of each reporting period. Inventories and
property, plant and equipment and depreciation thereon are remeasured at historic exchange rates. Revenue and expense accounts
other than depreciation for each month are remeasured at the appropriate daily rate of exchange. Net currency exchange gains and
losses from remeasurement are credited or charged on a current basis to other income (expense) net.
Derivatives: We use derivative financial instruments to manage exposure to foreign exchange risk. We do not apply hedge accounting
to our foreign currency derivative instruments. These instruments are primarily forward foreign currency exchange contracts that are
used as economic hedges to minimize the impact to earnings from exchange rate fluctuations on our non-U.S. dollar net balance sheet
exposures or for specified non-U.S. dollar forecasted transactions. Gains and losses from changes in the fair value of these forward
foreign currency exchange contracts are credited or charged on a current basis to other income (expense) net.
We do not use derivatives for speculative or trading purposes.
Revenue Recognition: Revenue from sales of our products, including shipping fees, is recognized when title to the products is
transferred to the customer, which usually occurs upon shipment or delivery, depending upon the terms of the sales order. Estimates of
returns for product quality reasons and of price allowances (calculated based upon historical experience, analysis of product shipments
and contractual arrangements with customers), are recorded when revenue is recognized. Allowances include discounts for prompt
payment, as well as volume-based incentives and special pricing arrangements. In addition, allowances for doubtful accounts are
recorded for estimated amounts of accounts receivable that may not be collected.
Revenue from sales of our products to distributors is recognized, net of allowances, based upon delivery of the products to the
distributors. At the time of delivery, title transfers to the distributors and payment from the distributors is due on our standard
commercial terms; payment terms are not contingent upon resale of the products. Credit allowances for the distributors are calculated
based on historical data, current economic conditions and contractual terms. For instance, we sell our products to distributors at
standard published prices, but we may grant price adjustment credits to distributors in response to individual competitive opportunities
they may have. To estimate allowances for this type of credit, we use statistical percentages of revenue, determined quarterly, based
upon recent historical adjustment trends.
We also provide distributors an allowance to scrap certain slow-moving or obsolete products in their inventory, estimated as a
negotiated fixed percentage of each distributor’s purchases from us. In addition, if we publish a new price for a product that is lower
than that paid by distributors for the same product still in distributor on-hand inventory, we may credit the distributors for the difference
between those prices. The allowance for this type of credit is based on the identified product price difference applied to estimated
distributor on-hand inventory of that product.
We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner.
Our contractual agreements with our intellectual property licensees determine the amount and timing of royalty revenue. Royalty
revenue is recognized when earned according to the terms of the agreements and when realization of payment is considered probable
by management. Where royalties are based upon licensee sales, we recognize royalty revenue upon the sale by the licensee of royalty-
bearing products, as estimated by us based on historical experience and analysis of annual sales results of licensees. Where warranted,
revenue from licensees may be recognized on a cash basis.
Shipping and handling costs are included in cost of revenue.
Advertising Costs: Advertising and other promotional costs are expensed as incurred. This expense was $194 million in 2007,
$216 million in 2006 and $126 million in 2005.