SanDisk 2012 Annual Report Download - page 174

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pricing and discounting practices for the specific product or maintenance when sold separately for all multiple
element products. In addition, the Company analyzes whether tangible products containing software and non-
software components that function together should be excluded from industry-specific software revenue
recognition guidance. Multiple element arrangements and arrangements that include software have been
immaterial to the Company’s revenue and operating results.
Revenues from patent licensing arrangements are recognized when earned, estimable and realizable. The
timing of revenue recognition is dependent on the terms of each license agreement and on the timing of sales of
licensed products. The Company generally recognizes royalty revenues when they are reported to the Company
by its licensees, which is generally one quarter in arrears from the licensees’ sales of licensed products. For
licensing fees that are not determined by the number of licensed units sold, the Company recognizes license fee
revenue on a straight-line basis over the life of the license.
The Company records estimated reductions of revenue for customer and distributor incentive programs and
offerings, including price protection, promotions, co-op advertising and other volume-based incentives and
expected returns. All sales incentive programs are recorded as an offset to product revenues or deferred revenues.
Marketing development programs are recorded as a reduction to revenues.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable include amounts owed
by geographically dispersed distributors, retailers and original equipment manufacturer (“OEM”) customers. No
collateral is required. Provisions are provided for sales returns and credit losses.
The Company estimates the collectability of its accounts receivable based on a combination of factors,
including but not limited to, customer credit ratings and historical experience. In circumstances where the
Company is aware of a specific customer’s inability to meet its financial obligations to the Company (e.g.,
bankruptcy filings or substantial downgrading of credit ratings), the Company provides allowances for bad debts
against amounts due to reduce the net recognized receivable to the amount it reasonably believes will be
collected.
Income Taxes. The Company accounts for income taxes using an asset and liability approach, which
requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company’s Consolidated Financial Statements, but have not been reflected in the
Company’s taxable income. The Company must evaluate the expected realization of its deferred tax assets and
determine whether a valuation allowance needs to be established or released. In determining the need for and
amount of a valuation allowance, the Company assesses the likelihood that it will be able to recover its deferred
tax assets using historical levels of income, estimates of future income and tax planning strategies. A valuation
allowance is established to the extent that the Company does not believe it is “more likely than not” that it will
generate sufficient taxable income in future periods to realize the benefit of its deferred tax assets.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
The Company recognizes the tax benefit from an uncertain tax position only if it is “more likely than not” the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such positions are then measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon settlement.
Foreign Currency. The Company determines the functional currency for its parent company and each of its
subsidiaries by reviewing the currencies in which their respective operating activities occur. Transaction gains
and losses arising from activities in other than the applicable functional currency are calculated using average
exchange rates for the applicable period and reported in net income as a non-operating item in each period. Non-
monetary balance sheet items denominated in a currency other than the applicable functional currency are
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