Texas Instruments 2012 Annual Report Download - page 51

ANNUAL
REPORT
TEXAS INSTRUMENTS 2012 ANNUAL REPORT • 49
Critical accounting policies
In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we
use statistical analyses, estimates and projections that affect the reported amounts and related disclosures and may vary from actual
results. We consider the following accounting policies to be both those that are most important to the portrayal of our financial condition
and that require the most subjective judgment. If actual results differ significantly from management’s estimates and projections, there
could be a significant effect on our financial statements.
Revenue recognition
Revenue from sales of our products, including sales to our distributors, is recognized upon shipment or delivery, depending upon the
terms of the sales order, provided that persuasive evidence of a sales arrangement exists, title and risk of loss have transferred to the
customer, the sales amounts are fixed or determinable, and collection of the revenue is reasonably assured. Revenue from sales of
our products that are subject to inventory consignment agreements is recognized when the customer or distributor pulls product from
consignment inventory that we store at designated locations.
We reduce revenue based on estimates of future credits to be granted to customers. Credits include volume-based incentives,
other special pricing arrangements and product returns due to quality issues. Our estimates of future credits are based on historical
experience, analysis of product shipments and contractual arrangements with customers and distributors.
In 2012, about 50 percent of our revenue was generated from sales of our products to distributors. We recognize distributor revenue
net of allowances, which are management’s estimates based on analysis of historical data, current economic conditions and contractual
terms. These allowances recognize the impact of credits granted to distributors under certain programs common in the semiconductor
industry whereby distributors receive certain price adjustments to meet individual competitive opportunities, or are allowed to return
or scrap a limited amount of product in accordance with contractual terms agreed upon with the distributor, or receive price protection
credits when our standard published prices are lowered from the price the distributor paid for product still in its inventory, or other
incentives designed to maximize growth opportunities. Historical claims data are maintained for each of the programs, with differences
among geographic regions 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. About 40 percent of our distributor revenue is generated from sales of
consigned inventory, and we expect this proportion to grow over time. The allowances we record against this revenue are not material.
In addition, we monitor collectability of accounts receivable primarily through review of the accounts receivable aging. When
collection 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 recoverability of our deferred
tax assets based on these criteria may change due to various factors, including changes in U.S. or international tax laws and changes
in market conditions and their impact on our assessment of taxable income in future periods. 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 in tax law enacted during the year could affect these estimates. Retroactive changes in tax law enacted
subsequent to the end of a reporting period are reflected in the period of enactment as a discrete tax item.