Avnet 2007 Annual Report Download - page 52

implied fair value of the reporting unit’s goodwill with its carrying value. To estimate fair value of each reporting
unit, the Company uses a combination of present value and multiple of earnings valuation techniques. The estimated
fair values could 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 2007, 2006 and 2005 yielded no impairments to the carrying value of the Company’s goodwill.
Foreign currency translation — 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 2007, 2006 and 2005, the Company’s net losses on foreign currency translation
(including the impact of foreign currency hedges in place) totaled $2,320,000, $3,449,000 and $737,000,
respectively.
Income taxes — 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 $908,600,000 of cumulative unremitted
earnings of foreign subsidiaries at June 30, 2007 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 — 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 — 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
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AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)