Ingram Micro 2008 Annual Report Download - page 75

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It is possible that these ongoing tax examinations may be resolved, that new tax exams may commence and that
other issues may be effectively settled within the next twelve months. However, the Company does not expect its
unrecognized tax benefits to change significantly over that time.
Note 8 — Fair Value Measurements
As discussed in Note 2, FAS 157 requires that assets and liabilities carried at fair value be classified and
disclosed in one of the following three categories: Level 1 — quoted market prices in active markets for identical
assets and liabilities; Level 2 — observable market-based inputs or unobservable inputs that are corroborated by
market data; and Level 3 — unobservable inputs that are not corroborated by market data.
At January 3, 2009, the Company’s assets and liabilities measured at fair value on a recurring basis included
cash equivalents of $619,463 and marketable trading securities of $33,081 determined based on Level 1 criteria, as
defined above, and a derivative assets of $14,458 and derivative liabilities of $17,198 determined based on Level 2
criteria. The change in the fair value of derivative instruments for the year ended January 3, 2009 was a gain of
$10,125, which is essentially offset by the change in fair value of the underlying hedged assets or liabilities. The fair
value of the cash equivalents approximated cost and the loss on the marketable trading securities was recognized in
the income statement to reflect these investments at fair value.
Note 9 — Transactions with Related Parties
In July 2005, the Company assumed from AVAD agreements with certain representative companies owned by
the former owners of AVAD, who subsequently became employed with Ingram Micro. These include agreements
with two of the representative companies to sell products on the Company’s behalf for a commission. The related
party transactions ended in 2007 by the sale of these companies to unrelated parties in the same year. For fiscal 2007
and 2006, total sales generated by these companies were approximately $7,662 and $11,100, respectively, resulting
in the Company’s recording of a commission expense of approximately $97 and $200, respectively.
Note 10 — Commitments and Contingencies
In 2003, the Company’s Brazilian subsidiary was assessed for commercial taxes on its purchases of imported
software for the period January to September 2002. The principal amount of the tax assessed for this period was
12.7 million Brazilian reais. Prior to February 28, 2007, and after consultation with counsel, it had been the
Company’s opinion that it had valid defenses to the payment of these taxes and it was not probable that any amounts
would be due for the 2002 assessed period, as well as any subsequent periods. Accordingly, no reserve had been
established previously for such potential losses. However, on February 28, 2007 changes to the Brazilian tax law
were enacted. As a result of these changes, and after further consultation with counsel, it is now the Company’s
opinion that it has a probable risk of loss and may be required to pay all or some of these taxes. Accordingly, in the
first quarter of 2007, the Company recorded a charge to cost of sales of $33,754, consisting of $6,077 for
commercial taxes assessed for the period January 2002 to September 2002, and $27,677 for such taxes that could be
assessed for the period October 2002 to December 2005. The subject legislation provides that such taxes are not
assessable on software imports after January 1, 2006. The sums expressed are based on an exchange rate of 2.092
Brazilian reais to the U.S. dollar, which was applicable when the charge was recorded. In the fourth quarters of 2008
and 2007, the Company released a portion of this commercial tax reserve amounting to $8,224 and $3,620,
respectively (19.6 million and 6.5 million Brazilian reais at a December 2008 exchange rate of 2.330 and December
2007 exchange rate of 1.771 Brazilian reais to the U.S. dollar, respectively). These partial reserve releases were
related to the unassessed periods from January through December 2003 and October through December 2002,
respectively, for which it is the Company’s opinion, after consultation with counsel, that the statute of limitations for
an assessment from Brazilian tax authorities had expired.
While the tax authorities may seek to impose interest and penalties in addition to the tax as discussed above, the
Company continues to believe that it has valid defenses to the assessment of interest and penalties, which as of
65
INGRAM MICRO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)