Texas Instruments 2007 Annual Report Download - page 59

TEXAS INSTRUMENTS 2007 ANNUAL REPORT 57
We reduce revenue based on estimates of future credits to be granted to customers. Credits are granted for reasons such as prompt
payment discounts, volume-based incentives, other special pricing arrangements and product returns due to quality issues. Our
estimates of future credits are based on historical experience, analysis of product shipments and contractual arrangements with
customers.
Distributor revenue is recognized net of allowances, which are management’s estimates based on analysis of historical data, current
economic conditions and contractual terms. These allowances recognize the impact of credits granted to distributors under certain
programs common in the semiconductor industry whereby distributors receive certain price adjustments to meet individual competitive
opportunities, or are allowed to return or scrap a limited amount of product in accordance with contractual terms agreed upon with
the distributor or receive price protection credits when our standard published prices are lowered from the price the distributor paid
for product still in their inventory. Historical claims data are maintained for each of the programs, with differences among geographic
regions taken into consideration. We continually monitor the actual claimed allowances against our estimates, and we adjust our
estimates as appropriate to reflect trends in distributor revenue and inventory levels. Allowances are also adjusted when recent
historical data do not represent anticipated future activity.
Our contractual agreements with our intellectual property licensees determine the amount and timing of royalty revenue. Royalty
revenue is recognized when earned according to the terms of the agreement and when realization of payment is considered probable
by management. Where royalties are based upon licensee sales, we recognize royalty revenue upon the sale by the licensee of royalty-
bearing products, as estimated by us, based on historical experience and analysis of annual sales results of licensees. Estimates are
periodically adjusted as a result of reviews of reported results of licensees, which reviews may take the form of independent audits.
Where warranted, revenue from licensees may be recognized on a cash basis.
In addition, we monitor collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and
circumstances indicate the collection of specific amounts or from specific customers is at risk, we assess the impact on amounts
recorded for bad debts and, if necessary, will record a charge in the period such determination is made.
Inventory Valuation Allowances
Inventory is valued net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. Allowances are
determined quarterly by comparing inventory levels of individual materials and parts to historical usage rates, current backlog and
estimated future sales and by analyzing the age of inventory, in order to identify specific components of inventory that are judged
unlikely to be sold. Allowances are also calculated quarterly for instances where inventoried costs for individual products are in excess
of market prices for those products. In addition to this specific identification process, statistical allowances are calculated for remaining
inventory based on historical write-offs of inventory for salability and obsolescence reasons. Inventory is written off in the period in
which disposal occurs. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and
calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and
other factors.
Income Taxes
In determining net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax
provisions and the resultant tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between
the tax and financial statement recognition of revenue and expense.
In the ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome is uncertain.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws. We recognize potential
liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on an estimate of the ultimate resolution of
whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can
be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and
accruals.