Netgear 2013 Annual Report Download - page 42

Table of Contents
product failure rates, material usage, and service delivery costs incurred in correcting product failures. The estimated cost associated with fulfilling the
warranty obligation to end-users is recorded in cost of revenue. Because our products are manufactured by third-
party manufacturers, in certain cases we
have recourse to the third-
party manufacturer for replacement or credit for the defective products. We give consideration to amounts recoverable from
our third-
party manufacturers in determining our warranty liability. Our estimated allowances for product warranties can vary from actual results and we
may have to record additional revenue reductions or charges to cost of revenue, which could materially impact our financial position and results of
operations.
In addition to warranty-
related returns, certain distributors and retailers generally have the right to return product for stock rotation purposes. Upon
shipment of the product, we reduce revenue for an estimate of potential future stock rotation returns related to the current period product revenue. We
analyze historical returns, channel inventory levels, current economic trends and changes in customer demand for our products when evaluating the
adequacy of the allowance for sales returns, namely stock rotation returns. Our estimated allowances for returns due to stock rotation can vary from
actual results and we may have to record additional revenue reductions, which could materially impact our financial position and results of operations.
We accrue for sales incentives as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair value
of the identifiable benefit received; otherwise, it is recorded as a reduction of revenues. Our estimated provisions for sales incentives can vary from
actual results and we may have to record additional expenses or additional revenue reductions dependent on the classification of the sales incentive.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We
regularly perform credit evaluations of our customers’
financial condition and consider factors such as historical experience, credit quality, age of the
accounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a customer’
s ability to pay. The
allowance for doubtful accounts is reviewed quarterly and adjusted if necessary based on our assessments of our customers’
ability to pay. If the
financial condition of our customers should deteriorate or if actual defaults are higher than our historical experience, additional allowances may be
required, which could have an adverse impact on operating expenses.
Valuation of Inventory
We value our inventory at the lower of cost or market, cost being determined using the first-in, first-
out method. We continually assess the value of
our inventory and will periodically write down its value for estimated excess and obsolete inventory based upon assumptions about future demand and
market conditions. On a quarterly basis, we review inventory quantities on hand and on order under non-
cancelable purchase commitments, including
consignment inventory, in comparison to our estimated forecast of product demand for the next nine months to determine what inventory, if any, are not
saleable. Our analysis is based on the demand forecast but takes into account market conditions, product development plans, product life expectancy and
other factors. Based on this analysis, we write down the affected inventory value for estimated excess and obsolescence charges. At the point of loss
recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration
or increase in that newly established cost basis. As demonstrated during prior years, demand for our products can fluctuate significantly. If actual
demand is lower than our forecasted demand and we fail to reduce our manufacturing accordingly, we could be required to write down additional
inventory, which would have a negative effect on our gross profit.
Goodwill
Goodwill represents the purchase price over estimated fair value of net assets of businesses acquired in a business combination. Goodwill acquired
in a business combination is not amortized, but instead tested for impairment at least annually during the fourth quarter. Should certain events or
indicators of impairment occur between annual impairment tests, we will perform the impairment test as those events or indicators occur. Examples of
such events or circumstances include the following: a significant decline in our expected future cash flows; a sustained, significant decline in our stock
price and market capitalization; a significant adverse change in the business climate; and slower growth rates.
Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than
not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying value. The qualitative assessment considers
the following factors: macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance, events
affecting the reporting units, and changes in our share price. If the reporting unit does not pass the qualitative assessment, then we estimate our fair value
and compare the fair value with the carrying value of our net assets. If the fair value is greater than the carrying value of our net assets, then no
impairment results. If the fair value is less than our carrying value, then we would determine the fair value of the goodwill by comparing the implied fair
value to the carrying value of the goodwill in the same manner as if we were being acquired in a business combination. Specifically, we
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