Western Digital 2008 Annual Report Download - page 61

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 collectability 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 $3.8 billion, $2.8 billion and $2.0 billion in 2008, 2007 and 2006, respectively.
Repurchases of reseller inventory were not material in 2008, 2007 or 2006.
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
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 periods 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 $3 million, $5 million and $6 million in 2008, 2007 and 2006, respectively.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)