Dell 2006 Annual Report Download - page 79

Table of Contents
DELL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Warranty Liabilities
The issues related to Dell's warranty liabilities include situations where certain vendor reimbursement agreements were
incorrectly accounted for as a reduction in the estimate of the outstanding warranty liabilities. There were also instances
where warranty reserves in excess of the estimated warranty liability, as calculated by the warranty liability estimation
process, were retained and not released to the income statement as appropriate. Additionally, certain adjustments in the
warranty liability estimation process were identified where expected future costs or estimated failure rates were not accurate.
Other Reserves and Accruals
Many of the restatement adjustments relate to the estimates and reconciliation of various reserves and accrued liabilities,
including employee benefits, accounts payable, litigation, sales commissions, payroll, employee bonuses, and supplier
rebates. Dell extensively reviewed its accruals and underlying estimates, giving consideration to subsequent developments
after the date of the financial statements, to assess whether any of the previously recorded amounts required adjustment.
Dell conducted expanded account reviews and expanded balance sheet reconciliations to ensure that all accounts were fully
reconciled, supported, and appropriately documented. As a result of this review, Dell determined that a number of its
accruals required adjustment across various accounting periods. The largest of these adjustments are described in more
detail below:
• Employee Bonuses — Certain employee bonuses were not accrued correctly, including the timing of the recording of the
accrual for the employee bonuses. Additionally, in certain cases when excess accruals resulted from differences in the
actual bonus payments, the excess accruals were not adjusted as appropriate.
• Vendor Funding Arrangements — In some instances vendor funding arrangements were not accounted for appropriately
under EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor. Certain amounts received from vendors were recorded as a reduction in operating expenses instead of being
correctly recorded as a reduction of cost of goods sold. Additionally, certain amounts received were retained on the balance
sheet and released in future periods despite the earnings process having been complete in the earlier period. Finally, there
were instances where the benefit of certain vendor funding was recorded prior to the completion of the earnings process.
• Unsubstantiated Accruals and Inadequately Reconciled Accounts — In some instances accrual and reserve accounts
lacked justification or supporting documentation. In certain cases these accounts were used to accumulate excess amounts
from other reserve and accrual accounts. However, these excess reserves were not released to the income statement in
the appropriate reporting period or were released for other purposes. In some instances accounts had incorrect balances
because they had not been properly reconciled or because reconciling items had not been adjusted timely.
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