Huawei 2014 Annual Report Download - page 53

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51Management Discussion and Analysis
percentage of inventory utilization, inventory categories
and conditions, and subsequent events with material
influences on inventory value. The company reviews the
inventory provisions periodically to ensure its accuracy
and reasonableness.
The company's inventory provisions charged to the
statement of profit or loss were CNY2,120 million and
CNY1,231 million for fiscal years ended December 31,
2014 and December 31, 2013, respectively.
Provision for Warranties
When recognizing revenue, the company estimates
the possible future liabilities that it may incur under its
product warranty obligations and records a warranty
provision. The warranty provision balances were
CNY3,662 million and CNY2,963 million as of December
31, 2014 and December 31, 2013, respectively. The
company's products are generally covered by a warranty
period of 12 months. The company accrues for warranty
costs as part of cost of sales based on historical
expenditure on material costs, technical support labor
costs, and associated overheads.
The warranty provisions accrued for fiscal years ended
December 31, 2014 and December 31, 2013 were
CNY3,892 million and CNY3,491 million, respectively.
Increases in warranty claims or higher cost of warranty
services will lead to actual warranty expenses exceeding
the accrued warranty provisions, and will in turn
adversely affect the company's gross margin.
Income Tax
The company is subject to income taxes in China and
numerous foreign jurisdictions. Significant judgment is
required in determining the consolidated provision for
income taxes.
During the ordinary course of business, there are many
transactions and calculations where the ultimate tax
determination is uncertain. The company recognizes tax
liabilities for anticipated tax issues based on estimates
of whether additional taxes will eventually be due.
The company adequately accrues for tax liabilities for
all open audit years based on its assessment of many
factors, including past experiences and interpretations
of tax law. Deferred tax assets are recognized to the
extent that future taxable profits will be available
against which the assets can be utilized.
Assessment of tax exposures and recognition relies on
estimates and assumptions and may involve a series of
complex judgments about future events. Where the final
tax outcome of these future events is different from the
amounts that were initially recorded, such differences
will impact the income tax and deferred tax provisions
for the period in which such decision is made.