Texas Instruments 2008 Annual Report Download - page 48

[ 46 ] TEXAS INSTRUMENTS 2008 ANNUAL REPORT
taken into consideration. We continually monitor the actual claimed allowances against our estimates, and we adjust our estimates as
appropriate to reflect trends in distributor revenue and inventory levels. Allowances are also adjusted when recent historical data do not
represent anticipated future activity.
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. Estimates are
periodically adjusted as a result of reviews of reported results of licensees, which reviews may take the form of independent audits.
Where warranted, revenue from licensees may be recognized on a cash basis.
In addition, we monitor collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts
and circumstances indicate the collection of specific amounts or from specific customers is at risk, we assess the impact on amounts
recorded for bad debts and, if necessary, will record a charge in the period such determination is made.
Income taxes
In determining net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax
provisions and the resultant tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between
the tax and financial statement recognition of revenue and expense.
In the ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome is uncertain.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws. We recognize potential liabilities
for anticipated tax audit issues in the U.S. and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the
extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final
outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.
As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely,
the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that
are estimated not to be ultimately recoverable. In this process, certain relevant criteria are evaluated including the existence of deferred
tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior years that can be used to absorb net operating
losses and credit carrybacks, and taxable income in future years. Our judgment regarding future taxable income may change due to
market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments
to the deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made.
In addition to the factors described above, the effective tax rate reflected in forward-looking statements is based on then-current tax
law. Significant changes during the year in enacted tax law could affect these estimates.
Inventory valuation allowances
Inventory is valued net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. Allowances are
determined quarterly by comparing inventory levels of individual materials and parts to historical usage rates, current backlog and
estimated future sales and by analyzing the age of inventory, in order to identify specific components of inventory that are judged
unlikely to be sold. Allowances are also calculated quarterly for instances where inventoried costs for individual products are in excess
of market prices for those products. In addition to this specific identification process, statistical allowances are calculated for remaining
inventory based on historical write-offs of inventory for salability and obsolescence reasons. Inventory is written off in the period in
which disposal occurs. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and
calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and
other factors.
Impairment of long-lived assets
We review long-lived assets for impairment when certain indicators suggest the carrying amount may not be recoverable. This review
process primarily focuses on intangible assets from business acquisitions; property, plant and equipment; and software for internal use
or embedded in products sold to customers. Factors considered include the under-performance of an asset compared with expectations
and shortened useful lives due to planned changes in the use of the assets. Recoverability is determined by comparing the carrying
amount of long-lived assets to estimated future undiscounted cash flows. If future undiscounted cash flows are less than the carrying
amount of the long-lived assets, an impairment charge would be recognized for the excess of the carrying amount over fair value
determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash-flow technique. Additionally, in
the case of assets that will continue to be used in future periods, a shortened depreciable life may be utilized if appropriate, resulting in
accelerated amortization or depreciation based upon the expected net realizable value of the asset at the date the asset will no longer
be utilized. Actual results may vary from estimates due to, among other things, differences in operating results, shorter useful lives of
assets and lower market values for excess assets.