Western Digital 1998 Annual Report Download - page 41

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 establishes the financial accounting and reporting standards for stock-
based compensation plans. The Company elected to continue accounting for stock-based employee compensation plans
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations (APB Opinion No. 25), as SFAS No. 123 permits, and to follow the pro forma net income, pro
forma earnings per share, and stock-based compensation plan disclosure requirements set forth in SFAS No. 123. See
Note 6 of Notes to Consolidated Financial Statements.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nos.
130 and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"), respectively (collectively, the "Statements"). The Statements are effective for
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive
income and its components in annual and interim financial statements. SFAS 131 establishes standards for reporting
financial and descriptive information about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or restatement of comparative financial
statements or financial information for earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' requirements is not expected to have a material impact on the Company's
consolidated financial position, results of operations or earnings (loss) per share data as currently reported.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all
fiscal quarters or fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards
for derivative instruments embedded in other contracts and for hedging activities. Application of this accounting
standard is not expected to have a material impact on the Company's consolidated financial position, results of
operations or liquidity.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value for all periods presented because of the
short-term maturity of these financial instruments. The fair value of the Company's convertible debentures is estimated
by reference to quoted information from market sources. At June 27, 1998, the market value of the Company's
convertible debentures was approximately $335 million, compared to the related carrying value of $469.2 million.
The carrying amounts of all other financial instruments in the consolidated balance sheets approximate fair values.
Foreign Exchange Contracts
The Company enters into short-term, forward exchange contracts to hedge the impact of foreign currency
fluctuations on certain underlying assets, liabilities and commitments for operating expenditures denominated in
foreign currencies. These contracts are not entered into for trading purposes, have maturity dates that do not exceed
twelve months, and are accounted for as hedges. The unrealized gains and losses on these contracts are deferred and
recognized in the results of operations in the period in which the hedged transactions are consummated. Costs
associated with entering into such contracts are typically amortized over the life of the instrument. At June 28, 1997
and June 27, 1998, the Company had outstanding $266.6 and $241.9 million, respectively, of forward exchange
contracts with commercial banks. As of June 28, 1997 and June 27, 1998, the unrealized gains and losses on
outstanding forward exchange contracts were not material. Realized gains and losses are primarily recorded in cost of
revenues in the accompanying consolidated statements of operations.
In response to the Company's underlying foreign currency exposures, the Company may, from time to time, adjust
its foreign currency hedging position by taking out additional contracts or by terminating or offsetting existing foreign
currency forward exchange contracts. Gains or losses on terminated contracts and offsetting contracts are recognized
in the results of operations in the periods in which the hedged transactions occur.