Avnet 2006 Annual Report Download - page 58

AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
change in the future due to changes in market and business conditions that could affect the assumptions and
estimates used in these valuation techniques. Furthermore, in a cyclical business, the timing of a valuation
may be an important factor in the outcome of the valuation exercise. The Company's annual impairment tests
in fiscal 2006, 2005 and 2004 yielded no impairments to the carrying value of the Company's goodwill.
Foreign currency translation Ì The assets and liabilities of foreign operations are translated into
U.S. dollars at the exchange rates in effect at the balance sheet date, with the related translation gains and
losses reported as a separate component of shareholders' equity and comprehensive income. Results of
operations are translated using the average exchange rates prevailing throughout the period. Transactions
denominated in currencies other than the functional currency of the Avnet business unit that is party to the
transaction (primarily trade receivables and payables) are translated at exchange rates in effect at the balance
sheet date or upon settlement of the transaction. Gains and losses from such translation are recorded to the
consolidated statements of operations as a component of ""other income, net.'' In fiscal 2006, 2005 and 2004,
the Company's net losses on foreign currency translation (including the impact of foreign currency hedges in
place) totaled $3,449,000, $737,000 and $1,774,000, respectively.
Income taxes Ì The Company follows the asset and liability method of accounting for income taxes.
Deferred income tax assets and liabilities are recognized for the estimated future tax impact of differences
between the financial statement carrying amounts of assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. Based upon historical and projected levels
of taxable income and analysis of other key factors, the Company records a valuation allowance against its
deferred tax assets, as deemed necessary, to state such assets at their net realizable value. The effect on
deferred income tax assets and liabilities of a change in tax rates is recognized in earnings in the period in
which the new rate is enacted.
No provision for U.S. income taxes has been made for approximately $619,528,000 of cumulative
unremitted earnings of foreign subsidiaries at July 1, 2006 because those earnings are expected to be
permanently reinvested outside the U.S. A hypothetical calculation of the deferred tax liability, assuming that
earnings were remitted, is not practicable.
Self-insurance Ì The Company is primarily self-insured for workers' compensation, and general, product
and automobile liability costs; however, the Company also has a stop-loss insurance policy in place to limit the
Company's exposure to individual and aggregate claims made. Liabilities for these programs are estimated
based upon outstanding claims and claims estimated to have been incurred but not yet reported based upon
historical loss experience. These estimates are subject to variability due to changes in trends of losses for
outstanding claims and incurred but not recorded claims, including external factors such as future inflation
rates, benefit level changes and claim settlement patterns.
Revenue recognition Ì Revenue from product sales is recognized in accordance with Securities and
Exchange Commission (""SEC'') Staff Accounting Bulletin No. 104 (""SAB 104''), Revenue Recognition.
Under SAB 104, revenue from product sales is 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 shipment to customers. Most of the Company's
product sales come from product Avnet purchases from a supplier and holds in inventory. A portion of the
Company's sales are shipments of product directly from its suppliers to its customers. In such circumstances,
Avnet negotiates the price with the customer, pays the supplier directly for the product shipped and bears
credit risk of collecting payment from its customers. Furthermore, in such drop-shipment arrangements,
Avnet bears responsibility for accepting returns of product from the customer even if Avnet, in turn, has a
right to return the product to the original supplier if the product is defective. Under these terms, the Company
serves as the principal with the customer, as defined under SAB 104 and Emerging Issues Task Force Issue
No. 99-19 (""EITF 99-19''), Reporting Revenue Gross as a Principal versus Net as an Agent, and therefore
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