Western Digital 2007 Annual Report Download - page 59

analyzes the different receivable aging categories and its bad debt loss history and establishes reserves based on a
combination of past due receivables and expected future losses based primarily on the Company’s historical levels of bad
debt losses. If the financial condition of a significant customer deteriorates resulting in its inability to pay its accounts
when due, or if the overall loss history of the Company changes significantly, an adjustment in the Company’s allowance
for doubtful accounts would be required, which could affect operating results.
Warranty
The Company records an accrual for estimated warranty costs when revenue is recognized. The Company generally
warrants its products for a period of one to five years. The warranty provision considers estimated product failure rates
and trends, estimated repair or replacement costs and estimated costs for customer compensatory claims related to
product quality issues, if any. A statistical warranty tracking model is used to help with estimates and assists in exercising
judgment in determining the underlying estimates. The statistical tracking model captures specific detail on hard drive
reliability, such as factory test data, historical field return rates, and costs to repair by product type. If actual product
return trends, costs to repair returned products or costs of customer compensatory claims differ significantly from
estimates, future results of operations could be materially affected. Management’s judgment is subject to a greater degree
of subjectivity with respect to newly introduced products because of limited field experience with those products upon
which to base warranty estimates. Management reviews the warranty accrual quarterly for products shipped in prior
periods and which are still under warranty. Any changes in the estimates underlying the accrual may result in
adjustments that impact current period gross margin and income. Such changes are generally a result of differences
between forecasted and actual return rate experience and costs to repair.
Advertising Expense
Advertising costs are expensed as incurred. Selling, general and administrative expenses of the Company include
advertising costs of $5 million, $6 million and $2 million in 2007, 2006 and 2005, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and
liabilities are recognized for temporary differences between the financial reporting basis and the tax basis of the assets and
liabilities and expected benefits of utilizing net operating loss (“NOL”) carryforwards. The Company records a valuation
allowance where it is more likely than not that the deferred tax assets will not be realized. Each period the Company
evaluates the need for a valuation allowance for the deferred tax assets and adjusts the valuation allowance so that the
Company records net deferred tax assets only to the extent that it has concluded it is more likely than not that these
deferred tax assets will be realized.
The Company records estimated liabilities for tax uncertainties. To the extent a tax position does not meet a
probable level of certainty, a liability is established based on the best estimate of the amount that will not be sustained.
However, the actual liability in any such contingency may be materially different from the estimates, which could result
in the need to record additional tax liabilities or potentially adjust previously recorded tax liabilities.
Per Share Information
The Company computes basic income per share using the net income and the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using the net income and the weighted
average number of common shares and potentially dilutive common shares outstanding during the period. Potentially
dilutive common shares include outstanding employee stock options, employee stock purchase plan shares and restricted
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)