Western Digital 2007 Annual Report Download - page 61

Download and view the complete annual report

Please find page 61 of the 2007 Western Digital annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 92

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92

Foreign Exchange Contracts
Although the majority of the Company’s transactions are in U.S. Dollars, some transactions are based in various
foreign currencies. The Company purchases short-term, forward exchange contracts to hedge the impact of foreign
currency fluctuations on certain underlying assets, liabilities and commitments for operating expenses and product costs
denominated in foreign currencies. The contracts have maturity dates that do not exceed six months. The Company does
not purchase short-term forward exchange contracts for trading purposes.
The Company applies the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, as amended, which establishes accounting and reporting standards for derivative instruments embedded in
other contracts and for hedging activities. The Company had outstanding forward exchange contracts with commercial
banks for Thai Baht, Malaysian Ringgit, British Pound Sterling and Euro with values of $493 million and $264 million
at June 29, 2007 and June 30, 2006, respectively. Thai Baht and Malaysian Ringgit contracts are designated as cash flow
hedges under SFAS No. 133. If the derivative is designated as a cash flow hedge, the effective portion of the change in fair
value of the derivative is initially deferred in other comprehensive income (loss), net of tax. These amounts are
subsequently recognized into earnings when the underlying cash flow being hedged is recognized into earnings.
Recognized gains and losses on foreign currency contracts entered into for factory related activities are reported in cost of
revenues. Hedge effectiveness is measured by comparing the hedging instrument’s cumulative change in fair value from
inception to maturity to the underlying exposure’s terminal value. The Company has determined that all of its hedging
instruments for all years presented were effective as defined under SFAS No. 133.
All other contracts are related to international sales activities and are designated as fair value hedges. These contracts
are not designated as hedging instruments under U.S. GAAP, and therefore, the change in the instrument’s fair value is
recognized currently in earnings and is reported as a component of non-operating income. Changes in fair value on these
contracts were not material to the consolidated financial statements for all years presented.
Use of Estimates
Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities
in conformity with generally accepted accounting principles. These estimates and assumptions have been applied using
methodologies, which are consistent throughout the periods presented. However, actual results could differ from these
estimates.
New Accounting Standards
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition. The interpretation applies to all tax positions related to income taxes subject to SFAS No. 109. FIN 48 is
effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be
accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is
currently evaluating the impact the adoption of FIN 48 will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides
guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities at fair value, the information used to
measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in
any new circumstances, but provides clarification on acceptable fair valuation methods and applications. SFAS 157 is
55
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)