Western Digital 2012 Annual Report Download - page 54

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inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates.
Refer to Part II, Item 8, Note 5 in the Notes to Consolidated Financial Statements, included in this Annual Report on
Form 10-K.
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 and tax credit carryforwards. We record a valuation
allowance when 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 a two-step process. 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 benefits in any such contingency may be materially
different from our estimates, which could result in the need to record additional liabilities for unrecognized tax bene-
fits or potentially adjust previously-recorded liabilities for unrealized tax benefits and materially affect our operating
results.
Stock-based Compensation
We account for all stock-based compensation at fair value. 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 and stock appreciation rights granted are estimated using a binomial model, and the fair values of all
Employee Stock Purchase Plan purchase rights are estimated using the Black-Scholes-Merton option-pricing model.
We account for SARs as liability awards based upon our intention to settle such awards in cash. The SARs liability is
recognized for that portion of fair value for the service period rendered at the reporting date. The share-based liability
is remeasured at each reporting date through the requisite service period. Both the binomial and the Black-Scholes-
Merton models require the input of highly subjective assumptions. 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 origi-
nal estimate, stock-based compensation expense and our results of operations could be materially affected.
Recent Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including the respective dates of
adoption and expected effects on our results of operations and financial condition, refer to Part II, Item 8, Note 1 of
the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated
by reference in response to this item.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosure About Foreign Currency Risk
Although the majority of our transactions are in U.S. dollars, some transactions are based in various foreign cur-
rencies. We purchase short-term, foreign exchange contracts to hedge the impact of foreign currency exchange
fluctuations on certain underlying assets, revenue, liabilities and commitments for operating expenses and product
costs denominated in foreign currencies. The purpose of entering into these hedge transactions is to minimize the
impact of foreign currency fluctuations on our results of operations. The contract maturity dates do not exceed
12 months. We do not purchase foreign exchange contracts for trading purposes. Currently, we focus on hedging our
foreign currency risk related to the British Pound Sterling, Euro, Japanese Yen, Malaysian Ringgit, Philippine Peso,
Singapore Dollar and Thai Baht. Singapore Dollar and Thai Baht contracts are designated as either cash flow or fair
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