Logitech 2004 Annual Report Download - page 71

Inventory Valuation
The Company must order components for its products and build inventory in advance of customer orders.
Further, the Company’s industry is characterized by rapid technological change, short-term customer
commitments and rapid changes in demand.
The Company records inventories at the lower of cost or market value and records write-downs of
inventories which are obsolete or in excess of anticipated demand or market value. A review of inventory is
performed each period that considers factors including the marketability and product lifecycle stage, product
development plans, component cost trends, demand forecasts and current sales levels. Inventory exposures are
identified by comparing inventory on hand and on order to forecasted sales and material requirements over the
next six, nine and twelve month periods. Inventory on hand which is not expected to be sold or utilized based on
review of forecasted sales and utilization is considered excess and the Company recognizes the write-off in cost
of sales at the time of such determination. If there were an abrupt and substantial decline in demand for
Logitech’s products or an unanticipated change in technological or customer requirements, the Company may be
required to record additional write-downs which could adversely affect gross margins in the period when the
write-downs are recorded.
Accounting for Income Taxes
Logitech operates in multiple jurisdictions and its profits are taxed pursuant to the tax laws of these
jurisdictions. The Company’s effective tax rate may be affected by the changes in or interpretations of tax laws in
any given jurisdiction, utilization of net operating losses and tax credit carryovers, changes in geographical mix
of income and expense, and changes in management’s assessment of matters such as the ability to realize
deferred tax assets. As a result of these considerations, the Company must estimate income taxes in each of the
jurisdictions in which it operates. This process involves estimating actual current tax exposure together with
assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are included in the consolidated balance
sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future
taxable income, and establish a valuation allowance for any amounts Logitech believes will not be recoverable.
Establishing or increasing a valuation allowance increases income tax expense, while releasing a valuation
allowance reduces income tax expense or increases additional paid-in capital.
Significant management judgment is required in determining the provision for income taxes, the deferred
tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. Logitech has
recorded a valuation allowance at March 31, 2004 due to uncertainties related to its ability to utilize some of the
deferred tax assets before they expire. The valuation allowance is based on estimates of taxable income by
jurisdiction in which the Company operates and the period over which the deferred tax assets will be recoverable.
In the event that actual results differ from these estimates or the Company adjusts these estimates in future
periods, Logitech may need to release a valuation allowance or establish an additional valuation allowance which
could materially impact the Company’s financial position and results of operations in the period when the
valuation allowances are adjusted.
Valuation of Long-Lived and Intangible Assets and Goodwill
The Company reviews long-lived assets, such as investments, property and equipment, and goodwill and
other intangible assets for impairment whenever events indicate that the carrying amount of these assets might
not be recoverable. Factors the Company considers important which could require it to review an asset for
impairment include the following:
• significant underperformance relative to historical or projected future operating results;
• significant changes in the manner of its use of the acquired assets or the strategy for its overall business;
• significant negative industry or economic trends;
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