Avnet 2006 Annual Report Download - page 35

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 different 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 operating loss carry-forwards is dependent upon its ability to generate sufficient 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.
The Company establishes reserves for potentially unfavorable outcomes of positions taken on certain tax
matters. These reserves are based on management's judgments and estimates of probable future tax liabilities.
As these estimates are highly judgmental, there may be differences between the anticipated and actual
outcomes of these matters that may result in reversals of reserves or additional tax liabilities in excess of the
reserved amounts. To the extent such adjustments are warranted, the Company's effective tax rate may
potentially fluctuate as a result.
Restructuring, Integration and Impairment Charges
The Company has been subject to the financial impact of integrating acquired businesses and charges
related to business reorganizations. In connection with such events, management is required to make estimates
about the financial 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 different from those estimated.
Additionally, in assessing the Company's goodwill for impairment in accordance with the Financial
Accounting Standards Board (""FASB'') Statement of Financial Accounting Standards No. 142
(""SFAS 142''), Goodwill and Other Intangible Assets, the Company is required to make significant
assumptions about the future cash flows 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 impairment charges to goodwill.
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
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