SanDisk 2008 Annual Report Download - page 48

Valuation of Long-Lived Assets, Intangible Assets and Goodwill. In accordance with Statement of
Financial Accounting Standards No. 144, or SFAS 144, Accounting for the Impairment or Disposal of Long-
Lived Assets, we perform tests for impairment of long-lived assets whenever events or circumstances suggest that
other long-lived assets may not be recoverable. This analysis differs from our goodwill analysis in that an
impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related
to the assets are less than the carrying value of the asset we are testing for impairment. If the forecasted cash
flows are less than the carrying value, then we must write down the carrying value to its estimated fair value
based primarily upon forecasted discounted cash flows. We recorded impairments of certain acquisition-related
amortizable intangible assets of $176 million in fiscal year 2008 based primarily upon forecasted discounted cash
flows. In addition, we recorded impairments of our investments in Flash Partners and Flash Alliance of
$83 million in fiscal year 2008 based primarily upon forecasted discounted cash flows. These forecasted
discounted cash flows include estimates and assumptions related to revenue growth rates and operating margins,
risk-adjusted discount rates based on our weighted average cost of capital, future economic and market
conditions and determination of appropriate market comparables. Our estimates of market segment growth and
our market segment share and costs are based on historical data, various internal estimates and certain external
sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage
the underlying business. Our business consists of both established and emerging technologies and our forecasts
for emerging technologies are based upon internal estimates and external sources rather than historical
information. If future forecasts are revised, they may indicate or require future impairment charges. We base our
fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently
uncertain. Actual future results may differ from those estimates.
We perform our annual impairment analysis of goodwill on the first day of the fourth quarter of each year,
or more often if there are indicators of impairment present. The provisions of Statement of Financial Accounting
Standards No. 142, or SFAS 142, Goodwill and Other Intangible Assets, require that a two-step impairment test
be performed on goodwill. In the first step, or Step 1, we compare our fair value to our carrying value. If the fair
value exceeds the carrying value of the net assets, goodwill is considered not impaired and we are not required to
perform further testing. If the carrying value of the net assets exceeds the fair value, then we must perform the
second step, or Step 2, of the impairment test in order to determine the implied fair value of goodwill. If the
carrying value of goodwill exceeds its implied fair value, then we would record an impairment loss equal to the
difference. To determine the fair value used in Step 1, we use our market capitalization based upon our quoted
closing stock price per NASDAQ, including an estimated control premium that an investor would be willing to
pay for a controlling interest in us. The determination of a control premium requires the use of judgment and is
based primarily on comparable industry and deal-size transactions, related synergies and other benefits. When we
are required to perform a Step 2 analysis, determining the fair value of our net assets and our off-balance sheet
intangibles used in Step 2 requires us to make judgments and involves the use of significant estimates and
assumptions. We performed our annual impairment test on the first day of the fourth quarter of fiscal year 2008
and determined that the goodwill was not impaired. However, based on a combination of factors, including the
economic environment, our current and forecasted operating results, NAND-industry pricing conditions and a
sustained decline in our market capitalization, we concluded that there were sufficient indicators to require us to
perform an interim goodwill impairment analysis during the fourth quarter of fiscal year 2008 and we recognized
an impairment charge of $845.5 million.
Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. We recognize
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 allowing price protection and/or right of return and,
therefore, the sales and related costs of these transactions are deferred until the retailers or distributors sell the
merchandise to their end customer, or the rights of return expire. At December 28, 2008 and December 30, 2007,
deferred income from sales to distributors and retailers was $75.7 million and $167.3 million, respectively.
Estimated sales returns are provided for as a reduction to product revenue and deferred revenue and were not
material for any period presented in our Consolidated Financial Statements.
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