Avnet 2004 Annual Report Download - page 31

operations and that require signiÑcant judgments and estimates. Management believes the Company's most
critical accounting policies relate to:
Valuation of Receivables: The Company maintains an allowance for doubtful accounts for estimated
losses resulting from customer defaults. Bad debt reserves are recorded based upon historic default averages as
well as the Company's regular assessment of the Ñnancial condition of its customers. Therefore, if collection
experience or the Ñnancial condition of speciÑc customers were to deteriorate, management would evaluate
whether additional allowances and corresponding charge to the consolidated statement of operations are
required.
Valuation of Inventories: Inventories are recorded at the lower of cost (Ñrst in Ì Ñrst out) or estimated
market value. The Company's inventories include high-technology components, embedded systems and
computing technologies sold into rapidly changing, cyclical and competitive markets whereby such inventories
may be subject to early technological obsolescence.
The Company regularly evaluates inventories for excess, obsolescence or other factors that may render
inventories less marketable. Write-downs are recorded so that inventories reÖect the approximate net
realizable value and take into account the Company's contractual provisions with its suppliers, which provide
certain protections to the Company for product obsolescence and price erosion in the form of rights of return
and price protection. Because of the large number of transactions and the complexity of managing the process
around price protections and stock rotations, estimates are made regarding adjustments to the carrying amount
of inventories. Additionally, assumptions about future demand, market conditions and decisions to discontinue
certain product lines can impact the decision to write down inventories. If assumptions about future demand
change or actual market conditions are less favorable than those projected by management, management
would evaluate whether additional write-downs of inventories are required. In any case, actual values could be
diÅerent from those estimated.
Accounting for Income Taxes: Management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax
assets. The carrying value of the Company's net foreign operating loss carry-forwards is dependent upon its
ability to generate suÇcient future taxable income in certain tax jurisdictions. In addition, the Company
considers historic levels of income, expectations and risk associated with estimates of future taxable income
and ongoing prudent and feasible tax planning strategies in assessing a tax valuation allowance. Should the
Company determine that it is not able to realize all or part of its deferred tax assets in the future, an additional
valuation allowance may be recorded against the deferred tax assets with a corresponding charge to income in
the period such determination is made.
Restructuring and Integration Charges: The Company has been subject to the Ñnancial impact of
integrating acquired businesses and charges related to business reorganizations. In connection with such
events, management is required to make estimates about the Ñnancial impact of such matters that are
inherently uncertain. Accrued liabilities and reserves are established to cover the cost of severance, facility
consolidation and closure, lease termination fees, inventory adjustments based upon acquisition-related
termination of supplier agreements and/or the re-evaluation of the acquired working capital assets (inventory
and accounts receivable), and write-down of other acquired assets including goodwill. Actual amounts
incurred could be diÅerent from those estimated.
Additionally, in assessing the Company's goodwill for impairment in accordance with SFAS 142, the
Company is required to make signiÑcant assumptions about the future cash Öows and overall performance of
its reporting units. Should these assumptions or the structure of the reporting units change in the future based
upon market conditions or changes in business strategy, the Company may be required to record additional
impairment charges to its remaining goodwill. See Change in Accounting Principle Ì Goodwill in this MD&A
for further discussion of SFAS 142 and the Company's evaluation of its goodwill for any potential impairment.
Contingencies and Litigation: The Company is involved in various legal proceedings and other claims
related to environmental, labor, product and other matters, all of which arise in the normal course of business.
The Company is required to assess the likelihood of any adverse judgment or outcome to these matters, as well
as the range of potential losses. A determination of the reserves required, if any, is made after careful analysis
by management and internal and, when necessary, external counsel. The required reserves may change in the
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