SanDisk 2004 Annual Report Download - page 54

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Table of Contents
Notes to Consolidated Financial Statements
Note 1: Organization and Summary of Significant Accounting Policies
Organization and Nature of Operations. SanDisk Corporation (together with its subsidiaries, the Company) was incorporated in
Delaware on June 1, 1988. The Company designs, develops and markets flash storage card products used in a wide variety of
consumer electronics products. The Company operates in one segment, flash memory storage products.
Basis of Presentation. The Company’s fiscal year ends on the Sunday closest to December 31. Fiscal 2004 consisted of 53 weeks
and fiscal 2003 and 2002 each consisted of 52 weeks.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its majority−owned
subsidiaries. All intercompany balances and transactions have been eliminated.
Reclassification. Certain reclassifications have been made to prior year’s amounts to conform to the current year’s presentation.
(See Note 2−Accumulated Other Comprehensive Income (Loss).) Share and equity amounts in the accompanying consolidated
financial statements give retroactive effect to a 2−for−1 stock split, in the form of a 100% stock dividend, effected on February 18,
2004.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
The estimates and judgments affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an on−going basis, the Company evaluates its estimates, including those related to customer programs and
incentives, product returns, bad debts, inventories, investments, income taxes, warranty obligations, restructuring and contingencies
and litigation. The Company bases estimates on historical experience and on other assumptions that its management believes are
reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and
liabilities when those values are not readily apparent from other sources. Actual results will differ from these estimates.
Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. The Company recognizes net revenues when
the earnings process is complete, as evidenced by an agreement with the customer, transfer of title and acceptance, if applicable, fixed
pricing and reasonable assurance of realization. Sales made to distributors and retailers are generally under agreements providing price
protection and/or allowing a right of return and, therefore, the product revenue and associated costs on these transactions is deferred
until the retailers or distributors sell the merchandise to their end customer, or the rights of return expire. Estimated sales returns are
provided for as a reduction to product revenue and were not material for any period presented in the accompanying consolidated
financial statements. The cost of shipping products to customers is included in costs of product revenues in the accompanying
consolidated income statements. The Company records expenses related to sales commissions in the period in which they are incurred.
The Company earns license and royalty revenue under patent license agreements with several companies. The timing and amount
of these payments can vary substantially from quarter to quarter, depending on the terms of each agreement and, in some cases, the
timing of sales of products by the Company’s licensee.
Revenue from patent licensing arrangements is recognized when earned and estimable. The Company generally recognizes royalty
revenue when it is reported to the Company by its licensees, which is generally one quarter in arrears from the licensees’ sales. The
Company recognizes license fees on a straight−line basis over the term of the license.
The Company has cross license arrangements that include a guaranteed access to flash memory supply but the Company does not
have vendor specific objective evidence of the fair value of the intellectual property exchanged or supply guarantees received. The
license fees under these arrangements are recognized on a straight−line basis over the life of the license. Royalties are recognized
when estimable. Revenue from sales of the flash memory supplied by the licensee is recognized as described above. The cost of
revenues associated F−8