SanDisk 2005 Annual Report Download - page 130

Inventories and Inventory Valuation. Inventories are stated at the lower of cost (first-in, first-out) or market.
Market value is based upon an estimated average selling price reduced by estimated costs of disposal. Should actual
market conditions differ from the Company’s estimates, the Company’s future results of operations could be
materially affected. Reductions in inventory valuation are included in costs of product revenues in the accom-
panying consolidated income statements. The Company’s inventory impairment charges permanently establish a
new cost basis and are not subsequently reversed to income even if circumstances later suggest that increased
carrying amounts are recoverable. Rather these amounts are reversed into income only if, as and when the inventory
is sold.
The Company reduces the carrying value of its inventory to a new basis for estimated obsolescence or
unmarketable inventory by an amount equal to the difference between the cost of the inventory and the estimated
market value based upon assumptions about future demand and market conditions, including assumptions about
changes in average selling prices. If actual market conditions are less favorable than those projected by manage-
ment, additional reductions in inventory valuation may be required.
The Company’s finished goods inventory includes consigned inventory held at customer locations as well as at
third-party fulfillment centers and subcontractors.
Intangible Assets. The excess of purchase price over the fair market value of acquired tangible assets, net of
liabilities, is recorded as identifiable intangible assets or to the extent there are not sufficient identifiable intangible
assets, as goodwill. The Company tests its intangible assets for impairment if indicators of impairment exist, and it
would then reduce the basis of the intangible asset accordingly. Identifiable intangible assets are amortized on a
straight-line basis over their estimated useful life, generally 3-5 years. Goodwill is evaluated for impairment
annually by reference to the lowest level reporting unit to which the goodwill relates. The Company has one
reporting unit based on the lowest level profit and loss summaries reviewed by the Company’s chief decision maker.
Other Long-Lived Assets. Intangible assets with definite useful lives and other long-lived assets are tested for
impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment
of Disposal of Long-Lived Assets. The Company assesses the carrying value of long-lived assets, whenever events or
changes in circumstances indicate that the carrying value of these long-lived assets may not be recoverable. Factors
the Company considers important which could result in an impairment review include (1) significant under-
performance relative to the expected historical or projected future operating results, (2) significant changes in the
manner of use of assets, (3) significant negative industry or economic trends and (4) significant changes in the
Company’s market capitalization relative to net book value. Any changes in key assumptions about the business or
prospects, or changes in market conditions, could result in an impairment charge and such a charge could have a
material adverse effect on the Company’s consolidated results of operations. When impairments are assessed, the
Company would record charges to reduce goodwill or other long-lived assets based on the amount by which the
carrying amounts of these assets exceed their fair values.
Warranty Costs. The majority of the Company’s products have a warranty ranging from one to five years. A
provision for the estimated future cost related to warranty expense is recorded at the time of customer invoice. The
Company’s warranty obligation is affected by product failure rates and repair or replacement costs incurred in
supporting a product failure. Should actual product failure rates, or repair or replacement costs differ from the
Company’s estimates, increases or decreases to its warranty liability would be required.
Advertising Expenses. Marketing co-op development programs, where the Company receives, or will
receive, an identifiable benefit (goods or services) in exchange for the amount paid to its customer and the
Company can reasonably estimate the fair value of the benefit it receives for the customer incentive payment, are
classified, when granted, as marketing expense, and costs of this type not meeting this criteria are classified as a
reduction to product revenue. Any other advertising expenses not meeting these conditions are expensed as
incurred. Prepaid advertising expenses were approximately $0.2 million and $0.4 million at January 1, 2006 and
January 2, 2005, respectively. Advertising expenses were $15.2 million, $20.4 million and $5.0 million, in 2005,
2004 and 2003, respectively.
F-11
Notes to Consolidated Financial Statements — (Continued)
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