SanDisk 2011 Annual Report Download - page 106

the cumulative effect of negative and positive evidence and the weight given to the potential effect of the
evidence. Recent historical income or loss and future projected operational results have the most influence on our
determinations of whether a deferred tax valuation allowance is required or not.
Our estimates for tax uncertainties require substantial judgment based upon the period of occurrence,
complexity of the matter, available federal tax case law, interpretation of foreign laws and regulations and other
estimates. There is no assurance that domestic or international tax authorities will agree with the tax positions we
have taken which could materially impact future results.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill. We perform tests for impairment of long-
lived assets whenever events or circumstances suggest that other long-lived assets may not be recoverable. 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. 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 growth and our market 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 and indefinite-lived intangible assets (such as
in-process research and development) on the first day of the fourth quarter of each fiscal year, or more often if
there are indicators of impairment. We allocate goodwill to reporting units based on the reporting unit expected
to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary,
reassign goodwill using a relative fair value allocation approach. For our annual goodwill impairment test in
fiscal year 2011, we adopted the authoritative guidance issued by the Financial Accounting Standards Board in
September 2011. In accordance with this guidance, we first assessed qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is “more likely than not” that the fair value of
a reporting unit is less than its carrying amount and whether the two-step impairment test on goodwill is
required. If based upon qualitative factors it is “more likely than not” that the fair value of a reporting unit is
greater than its carrying amount, we will not be required to proceed to a two-step impairment test on goodwill.
However, we also have the option to proceed directly to a two-step impairment test on goodwill. In the first step,
or Step 1, of the two-step impairment test, we compare the fair value of each reporting unit to its 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 two-step 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. The fair value of each reporting unit is estimated using a discounted cash
flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which
is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the
useful life over which cash flows will occur, and determination of our weighted average cost of capital. We
evaluate the reasonableness of the fair value calculations of our reporting units by reconciling the total of the fair
values of all of our reporting units to our total market capitalization, taking into account an appropriate control
premium. 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.
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