Avnet 2005 Annual Report Download - page 33

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 future due to
developments or a change in circumstances. Changes to reserves could increase or decrease earnings in the
period the changes are effective.
The Company does not consider revenue recognition to be a critical accounting policy due to the nature
of its business in which revenues are generally recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the sales price is fixed or determinable and collectibility
is reasonably assured. Generally, these criteria are met upon the actual shipment of product to the customer.
Accordingly, other than for estimates related to possible returns of products from customers, discounts or
rebates, the recording of revenue does not require significant judgments or estimates. Provisions for returns are
estimated based on historical sales returns, credit memo analysis and other known factors. Provisions are made
for discounts and rebates, which are primarily volume-based, and are generally based on historical trends and
anticipated customer buying patterns. Finally, revenues from maintenance contracts, which are deferred and
recognized to income over the life of the agreement, are not material to the consolidated results of operations
of the Company.
Recently Issued Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154 (""SFAS 154''),
Accounting Changes and Error Corrections. SFAS 154 applies to all voluntary changes in accounting principle
as well as to changes required by an accounting pronouncement that does not include specific transition
provisions. SFAS 154 eliminates the requirement in Accounting Principles Board Opinion No. 20, Accounting
Changes, to include the cumulative effect of changes in accounting principle in the income statement in the
period of change and, instead, requires changes in accounting principle to be retrospectively applied.
Retrospective application requires the new accounting principle to be applied as if the change occurred at the
beginning of the first period presented by modifying periods previously reported, if an estimate of the prior
period impact is practicable and estimable. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company does not currently anticipate
any changes in accounting principle other than the adoption of SFAS 123(R) discussed below, which has its
own adoption transition provision and is therefore not in the scope of SFAS 154. As a result, Avnet does not
believe the adoption of SFAS 154 will have a material impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payments
(""SFAS 123(R)'') which revises SFAS No. 123, Accounting for Stock-Based Compensation and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, be measured at fair value and expensed in
the consolidated statement of operations over the service period (generally the vesting period). SFAS 123(R)
is effective in Avnet's first quarter of fiscal 2006 at which point the Company has now begun to record the
expense associated with share-based payments to employees. Upon adoption subsequent to fiscal 2005, the
Company transitioned to SFAS 123(R) using the modified prospective application, whereby compensation
cost is only recognized in the consolidated statements of operations beginning with the first period that
SFAS 123(R) is effective and thereafter, with prior periods still presented on a pro forma basis. Management
has not yet quantified what the precise impact of adopting SFAS 123(R) will be in the first quarter of fiscal
2006 and thereafter. However, the pro-forma impacts of expensing share-based payments on the periods
presented herein are presented in Note 1 to the consolidated financial statements appearing in Item 15 of this
Report. Management expects that the fiscal 2005 pro forma impacts will be a reasonable approximation of the
expense associated with share-based payments in fiscal 2006. In addition, the Company will continue to use
the Black-Scholes option valuation model to value stock options.
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