Western Digital 2008 Annual Report Download - page 49

production. The weighted average method of valuing precious metals does not materially differ from a first-in, first-out
method. We record inventory write-downs for the valuation of inventory at 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.
We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing estimated
demand, inventory on hand, sales levels and other information, and reduce inventory balances to net realizable value for
excess and obsolete inventory based on this analysis. Unanticipated changes in technology or customer demand could
result in a decrease in demand for one or more of our products, which may require a write down of inventory that could
negatively affect operating results.
Litigation and Other Contingencies
We apply SFAS No. 5, “Accounting for Contingencies,” to determine when and how much to accrue for and disclose
related to legal and other contingencies. Accordingly, we disclose contingencies deemed to be reasonably possible and
accrue loss contingencies when, in consultation with our legal advisors, we conclude that a loss is probable and reasonably
estimable (Refer to Part II, Item 8, Note 5 in the Notes to Consolidated Financial Statements, included in this Annual
Report on Form 10-K). The ability to predict the ultimate outcome of such matters involves judgments, estimates and
inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates.
Income Taxes
We account for income taxes under the asset and liability method, which provides that deferred tax assets and
liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of our assets and
liabilities and expected benefits of utilizing net operating loss (“NOL”) and tax credit carryforwards. We record a
valuation allowance where it is more likely than not that the deferred tax assets will not be realized. Each period we
evaluate the need for a valuation allowance for our deferred tax assets and we adjust the valuation allowance so that we
record net deferred tax assets only to the extent that we conclude it is more likely than not that these deferred tax assets
will be realized.
We recognize liabilities for uncertain tax positions based on the two-step process prescribed in FIN 48. To the extent
a tax position does not meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements.
If a position meets the more-likely-than-not level of certainty, it is recognized in the financial statements at the largest
amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties related
to unrecognized tax benefits are recognized on liabilities recorded for uncertain tax positions and are recorded in our
provision for income taxes. The actual liability for unrealized tax benefit in any such contingency may be materially
different from our estimates, which could result in the need to record additional liabilities for unrecognized tax benefits
or potentially adjust previously recorded liabilities for unrealized tax benefits.
Stock-Based Compensation
We account for all stock-based compensation in accordance with the fair value recognition provisions of
SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). Under these provisions, stock-based compensation cost
is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. The fair
values of all stock options granted are estimated using a binomial model, and the fair values of all Employee Stock
Purchase Plan (“ESPP”) shares are estimated using the Black-Scholes-Merton option pricing model. Both the binomial
and the Black-Scholes-Merton models require the input of highly subjective assumptions. Under SFAS 123(R), we are
required to use judgment in estimating the amount of stock-based awards that are expected to be forfeited. If actual
forfeitures differ significantly from the original estimate, stock-based compensation expense and our results of operations
could be materially impacted.
New Accounting Standards
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
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