Avnet 2007 Annual Report Download - page 53

versus Net as an Agent, and therefore recognizes the sale and cost of sale of the product upon receiving notification
from the supplier that the product has shipped.
In addition, the Company has more limited contractual relationships with certain of its customers and suppliers
whereby Avnet assumes an agency relationship in the transaction as defined by EITF 99-19. In such arrangements,
the Company recognizes the fee associated with serving as an agent in sales with no associated cost of sales.
During the third quarter of fiscal 2007, in conjunction with the acquisition of Access and reflecting recent
industry trends, the Company reviewed its method of recording revenue related to the sales of supplier service
contracts and determined that such sales will now be classified on a net revenue basis rather than on a gross basis
beginning the third quarter of fiscal 2007. Although this change reduces sales and cost of sales for the Technology
Solutions operating group and on a consolidated basis, it has no impact on operating income, net income, cash flow
or the balance sheet. The impact of this change on prior periods is that sales and cost of sales would have been
reduced by $214,417,000, or 2.8%, for the first half of fiscal 2007 which is the period in fiscal 2007 before the
change was effective, by $387,326,000, or 2.7%, for fiscal 2006 and $340,282,000, or 3.1%, fiscal 2005.
Revenues from maintenance contracts are recognized ratably over the life of the contracts, ranging from one to
three years.
Revenues are recorded net of discounts, rebates and estimated returns. Provisions are made for discounts and
rebates, which are primarily volume-based, and are based on historical trends and anticipated customer buying
patterns. Provisions for returns are estimated based on historical sales returns, credit memo analysis and other
known factors.
Comprehensive income — Comprehensive income represents net income for the year adjusted for changes in
shareholders’ equity from non-shareholder sources. Accumulated comprehensive income items typically include
currency translation and the impact of the Company’s pension liability adjustment, net of tax (see Note 4).
Stock-based compensation — Beginning in fiscal 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-based Payment (“SFAS 123R”), which revises SFAS No. 123,
Accounting for Stock-based Compensation and supersedes Accounting Principles Board Opinion No. 25 (“APB
25”), Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments, including grants of
employee stock options, be measured at fair value and expensed in the consolidated statement of operations over the
service period (see Note 12). Prior to fiscal 2006, the Company accounted for its stock-based compensation plans
using the intrinsic value method initially prescribed by APB 25. In applying APB 25, no expense was recognized
upon grant of stock options under the Company’s various stock option plans, except in the rare circumstances where
the exercise price was less than the fair market value on the grant date, nor was expense recognized in connection
with shares purchased by employees under the Employee Stock Purchase Plan (see Note 12).
Concentration of credit risk — Financial instruments that potentially subject the Company to a concentration
of credit risk principally consist of cash and cash equivalents and trade accounts receivable. The Company invests
its excess cash primarily in overnight Eurodollar time deposits and institutional money market funds with quality
financial institutions. The Company sells electronic components and computer products primarily to original
equipment and contract manufacturers, including the military and military contractors, throughout the world. To
reduce credit risk, management performs ongoing credit evaluations of its customers’ financial condition and, in
some instances, has obtained insurance coverage to reduce such risk. The Company maintains reserves for potential
credit losses, but has not experienced any material losses related to individual customers or groups of customers in
any particular industry or geographic area.
Fair value of financial instruments — The carrying amounts of the Company’s financial instruments,
including cash and cash equivalents, receivables and accounts payable approximate their fair values at June 30,
2007 due to the short-term nature of these instruments. See Note 7 for further discussion of the fair value of the
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AVNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)