SanDisk 2002 Annual Report Download - page 39

3 7 2 0 0 2 Annua l Re port
reported am ounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities. On
an on-going basis, the Com pany evaluates its estim ates,
including those related to custom er programs and incentives,
product returns, bad debts, inventories, investm ents, incom e
taxes, w arranty obligations, restructuring, and contingencies
and litigation. The Com pany bases estim ates on historical
experience and on various other assumptions that it believes
are reasonable under the circum stances, the results of w hich
form the basis for m aking judgm ents about the carrying val-
ues of assets and liabilities that are not readily apparent from
other sources. Actual results m ay differ from these estim ates
under different assumptions or conditions.
Re venue Re c o g nition, Sa les Re turns and Allow anc es
and Sale s Inc entive Pro g ra m s . The Com pany recognizes
net revenues w hen the earnings process is com plete, as evi-
denced by an agreem ent w ith the custom er, transfer of title
and acceptance, if applicable, fixed pricing and reasonable
assurance of collectibility. Because of frequent sales price
reductions and rapid technology obsolescence in the indus-
try, sales m ade to distributors and retailers under agree-
m ents allow ing price protection and/or right of return are
deferred until the retailers or distributors sell the m erchan-
dise to the end custom er, or the rights of return expire. At
Decem ber 31, 2002 and 2001, deferred incom e, net of
related costs, from sales to distributors and retailers w as
$34.8 m illion and $6.2 m illion, respectively. Estim ated prod-
uct returns w ere not m aterial for any period presented in the
consolidated financial statem ents.
The Com pany earns patent license and royalty revenue
under patent cross-license agreem ents w ith several compa-
nies including Hitachi Ltd., Lexar M edia, Inc., Samsung
Electronics Com pany Ltd., Sharp Electronics Corporation,
Silicon Storage Technology, Inc., Sm artDisk Corporation, Sony
Corporation, and TDK. The Com pany’s current license agree-
m ents provide for the paym ent of license fees, royalties, or a
combination thereof, to the Com pany. The tim ing and
am ount of these paym ents can vary substantially from quar-
ter to quarter, depending on the term s of each agreem ent
and, in som e cases, the tim ing of sales of products by the
other parties.
Patent license and royalty revenue is recognized w hen
earned. For the three years ended Decem ber 31, 2002, the
Com pany received paym ents under these cross-license
agreem ents, portions of w hich w ere recognized as revenue
and portions of w hich are deferred revenue. The Com pany
receives royalty revenue reports from certain of its licensees
and records all revenues one quarter in arrears. The
Com pany’s cross license arrangem ents, that include a guar-
anteed access to flash m em ory supply, w ere recorded
based upon the cash received for the arrangement as the
Com pany does not have vendor specific objective evidence
for the fair value of the intellectual property exchanged or
supply guarantees received. Under these arrangem ents the
Com pany has recorded the cash received as the total value
of goods received and is amortizing the am ounts over the
life of the agreem ent, w hich corresponds to the life of the
supply arrangem ent as w ell. Recognition of deferred rev-
enue is expected to occur in future periods over the life of
the agreem ents, as the Com pany m eets certain obligations
as provided in the various agreem ents. At Decem ber 31,
2002 and 2001, deferred revenue from patent license agree-
m ents w as $32.1 m illion and $9.6 m illion, respectively. The
cost of revenues associated w ith patent license and royalty
revenues are insignificant.
The Com pany records reductions to revenue and trade-
accounts receivable for custom er programs and incentive
offerings including prom otions and other volum e-based
incentives w hen revenue is recorded. M arketing develop-
m ent program s, w hen granted, are either recorded as a
reduction to revenue or as an addition to m arketing
expense depending on the contractual nature of the pro-
gram and w hether the conditions of Em erging Issues Task
Force (“EITF”) Issue No. 00-25, “ Vendor Incom e Statem ent
Characterization Paid to a Reseller of the Vendor’s
Products,” have been m et. These incentives generally
apply only to its retail custom ers, w hich represented 64%,
54% and 28% of its product revenues in 2002, 2001 and
2000, respectively. If m arket conditions w ere to decline,
the Com pany m ay take actions to increase custom er
incentive offerings to its retail custom ers, possibly resulting
in an increm ental reduction of revenue at the tim e the
incentive is offered.
Allo w anc e fo r Doub tful Ac co unts. The Com pany evalu-
ates the collectibility of its accounts receivable based on a
combination of factors. In circum stances w here the
Com pany is aw are of a specific custom er’s inability to m eet
its financial obligations to the Com pany (e.g., bankruptcy fil-
ings, substantial dow n-grading of credit ratings), the
Com pany records a specific reserve for bad debts against
am ounts due to reduce the net recognized receivable to the
am ount it reasonably believes w ill be collected. For all other
custom ers, the Com pany recognizes reserves for bad debts
based on the length of tim e the receivables are past due
based on its historical experience. If circumstances change
(i.e., higher than expected defaults or an unexpected m ate-
rial adverse change in a m ajor custom er’s ability to m eet its
financial obligations to it), the Com pany’s estimates of the
recoverability of am ounts due it could be reduced by a
m aterial am ount.
W arranty Co sts. The Com pany’s products are w ar-
rantied for one to seven years. A provision for the estim ated
future cost related to w arranty expense is recorded and
included in the cost of revenue w hen revenue is recognized.
While the Com pany engages in product quality program s
and processes, its w arranty obligation is affected by product
failure rates and repair or replacem ent costs incurred in cor-
recting a product failure. Should actual product failure rates,
repair or replacem ent costs differ from the Com pany’s esti-
m ates, increases to its w arranty liability w ould be required.