3Ware 2002 Annual Report Download - page 38

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Valuation of Deferred Income Taxes
We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more
likely to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. If we determine that we will not realize all or part of
our deferred tax assets in the future, we will have to make an adjustment to the carrying value of the deferred tax
asset, which would be reflected as an income tax expense. Conversely, if we determine that we will realize a
deferred tax asset, which currently has a valuation allowance, we would be required to reverse the valuation
allowance which would be reflected as an income tax benefit.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in
Financial Statements” (“SAB 101”). SAB 101 requires that four basic criteria be met before revenue can be
recognized: 1) evidence an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and
4) collectability is reasonably assured. We recognize revenue upon determination that all criteria for revenue
recognition have been met. The criteria are usually met at the time of product shipment, except for shipments to
distributors with rights of return. Shipments to distributors with rights of return are deferred until all return or
cancellation privileges lapse. In addition, we record reductions to revenue for estimated allowances such as
returns and competitive pricing programs. If actual returns or pricing adjustments exceed our estimates,
additional reductions to revenue would result.
Allowance for Bad Debt
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. Our allowance for doubtful accounts is based on our assessment of the
collectability of specific customer accounts, the aging of accounts receivable, our history of bad debts and the
general condition of the industry. If a major customer’s credit worthiness deteriorates, or our customers’ actual
defaults exceed our historical experience, our estimates could change and impact our reported results.
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