Western Digital 2007 Annual Report Download - page 58

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accounts receivable of $697 million and $481 million, respectively. The Company also has cash equivalent and short-
term investment policies that limit the amount of credit exposure to any one financial institution or investment
instrument and require that investments be made only with financial institutions or in investment instruments evaluated
as highly credit-worthy.
Inventory Valuation
The Company values inventory at the lower of cost (first-in, first-out basis) or net realizable value. Inventory write-
downs are recorded to reduce the carrying value of inventory to the lower of cost or net realizable value by analyzing
market conditions and estimates of future sales prices as compared to inventory costs and inventory balances. The
Company evaluates inventory balances for excess quantities and obsolescence on a regular basis by analyzing estimated
demand, inventory on hand, sales levels and other information, and reduces inventory balances to net realizable value for
excess and obsolete inventory based on this analysis.
Property and Equipment
The cost of property and equipment is depreciated over the estimated useful lives of the respective assets. The
Company’s buildings are being depreciated over periods ranging from fifteen to thirty years. The majority of the
Company’s equipment is being depreciated over periods of three to seven years. Depreciation is computed on a straight-
line basis. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related
lease terms.
Intangible Assets
Intangible assets consist of purchased technology acquired in asset acquisitions. These assets are being amortized
over a weighted average period of three years. During the fiscal years ended June 29, 2007, June 30, 2006 and July 1,
2005, the Company recorded $3 million, $4 million and $14 million of amortization expense related to these intangible
assets, respectively. Amortization expense for intangible assets is estimated to be $3 million in 2008.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition in Financial Statements.” Under SAB No. 104, revenue is recognized when the title and risk of loss have
passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred, or services have been
rendered, the sales price is fixed or determinable and collectibility is reasonably assured. The Company establishes
provisions against revenue and cost of revenue for estimated sales returns in the same period that the related revenue is
recognized based on existing product return notifications.
In accordance with standard industry practice, the Company has agreements with resellers that provide limited
price protection for inventories held by resellers at the time of published list price reductions and other incentive
programs. Either party may terminate these agreements upon written notice. In the event of termination, the Company
may be obligated to repurchase a certain portion of the resellers’ inventory. The Company records a reduction to revenue
for estimated price protection and other programs in effect until the resellers sell such inventory to their customers. These
adjustments are based on anticipated price decreases during the reseller holding period, estimated amounts to be
reimbursed to qualifying customers, as well as historical pricing information. If end-market demand for hard drives
declines significantly, the Company may have to increase sell-through incentive payments to resellers, resulting in an
increase in price protection allowances, which could adversely impact operating results. Net revenue recognized on sales
to resellers was approximately $2.8 billion, $2.0 billion and $1.5 billion in 2007, 2006 and 2005, respectively.
Repurchases of reseller inventory were not material in 2007, 2006 or 2005.
Western Digital establishes an allowance for doubtful accounts by analyzing specific customer accounts and
assessing the risk of loss based on insolvency, disputes or other collection issues. In addition, the Company routinely
52
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)