8x8 2015 Annual Report Download - page 42

Collectability of Accounts Receivable
We must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts receivable, including
historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms
when evaluating the adequacy of the allowance for doubtful accounts. As of March 31, 2015, the accounts receivable balance was $6.6 million,
net of an allowance for doubtful accounts of $0.5 million, including a reserve for disputed credits, and an estimated returns reserve of $0.1
million. If the financial condition of our customers deteriorates, our actual losses may exceed our estimates, and additional allowances would be
required.
Valuation of Inventories
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand, market conditions and replacement costs. If actual future demand or
market conditions are less favorable than those projected by us, additional inventory write-downs may be required.
Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite useful lives are not amortized. Goodwill represents the excess fair value of consideration
transferred over the fair value of net assets acquired in business combinations. The carrying value of goodwill and indefinite lived intangible
assets are not amortized, but are annually tested for impairment and more often if there is an indicator of impairment.
We perform an annual impairment assessment in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to
determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For
reporting units in which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is
not considered impaired and we are not required to perform the two-step goodwill impairment test. Qualitative factors considered in this
assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the
reporting unit.
Income and Other Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions
in which we operate. This process requires us to estimate our actual current tax expense and to assess temporary differences resulting from book-
tax accounting differences for items such as accrued vacation. These differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. In the event that we determine that we
would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would
reduce income tax expense in the period such determination was made.
Significant management judgment is required to determine the valuation allowance recorded against our net deferred tax assets, which include
net operating loss and tax credit carry forwards. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we
operate and the period over which our deferred tax assets will be recoverable. During the fourth quarter of fiscal 2015, we evaluated the need for
a valuation allowance against our net deferred tax asset and concluded that we needed less of an allowance. Therefore, we decreased our
valuation allowance by approximately $1.5 million, as certain California net operating losses will not be utilized as they have expired in fiscal
2015. During the fourth quarters of fiscal 2014 and 2013, we evaluated the need for a valuation allowance against our net deferred tax asset and
concluded that an additional allowance was needed. Therefore, we increased our valuation allowance related to our state and federal net
operating loss and tax credit carryovers which resulted in reversals of previous income statement credits of approximately $1.3 million and $1.0
million, respectively. We determined that an increase in our valuation allowance was appropriate as a result of the change in the net income
apportionment methodology in California and the acquisition of Voicenet in the third quarter of fiscal 2014. In making this determination, we
considered all available positive and negative evidence, including our recent earnings trend and expected continued future taxable income. As of
March 31, 2015, the net deferred tax asset on the consolidated balance sheet represented the projected tax benefit we expect to realize. We
continue to maintain a valuation allowance against the portion of our deferred tax assets that we believe is more likely than not to be used to
reduce our income tax liability.
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