Texas Instruments 2009 Annual Report Download - page 46

TEXAS INSTRUMENTS 2009 ANNUAL REPORT
PAGE 44
In addition, we monitor collectibility of accounts receivable primarily through review of the accounts receivable aging. When
collection 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.
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.
As part of our financial process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely,
the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that
are estimated not to be ultimately recoverable. In this process, certain relevant criteria are evaluated including the existence of deferred
tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior years that can be used to absorb net operating
losses and credit carrybacks, and taxable income in future years. Our judgment regarding future taxable income may change due to
market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments
to the deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made.
In addition to the factors described above, the effective tax rate reflected in forward-looking statements is based on then-current tax
law. Significant changes during the year in enacted tax law could affect these estimates.
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. 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.
Impairment of long-lived assets, intangibles and goodwill
We review long-lived assets for impairment when certain indicators suggest the carrying amount may not be recoverable. This review
process primarily focuses on acquisition-related intangible assets; property, plant and equipment; and software for internal use or
embedded in products sold to customers. Factors considered include the under-performance of an asset compared with expectations
and shortened useful lives due to planned changes in the use of the assets. Recoverability is determined by comparing the carrying
amount of long-lived assets to estimated future undiscounted cash flows. If future undiscounted cash flows are less than the carrying
amount of the long-lived assets, an impairment charge would be recognized for the excess of the carrying amount over fair value
determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash-flow technique. Additionally, in
the case of assets that will continue to be used in future periods, a shortened depreciable life may be utilized if appropriate, resulting in
accelerated amortization or depreciation based upon the expected net realizable value of the asset at the date the asset will no longer
be utilized. Actual results may vary from estimates due to, among other things, differences in operating results, shorter useful lives
of assets and lower market values for excess assets. Additionally, we review goodwill for impairment annually, or more frequently if
certain impairment indicators arise such as significant changes in business climate, operating performance or competition, or upon the
disposition of a significant portion of a reporting unit. This review compares the fair value for each reporting unit containing goodwill to
its carrying value.
Valuation of auction-rate securities
The fair value of our auction-rate securities is estimated using a discounted cash flow (DCF) model that requires inputs that are
supported by little or no market activity and reflect significant management judgment. Assumptions used in preparing the DCF model
include estimates for the amount and timing of future interest and principal payments and the rate of return required by investors to
own these securities in the current environment. In making these assumptions, we consider relevant factors including: the formula