Western Digital 2000 Annual Report Download - page 43

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
OEM. If subsequent to its initial order the OEM changes its requirements, inventory held at these facilities
can be sold to other OEM's or distributors as is or with minor modiÑcations (such as a change in labeling) at
little or no additional cost.
Depreciation and Amortization
The cost of property and equipment is depreciated over the estimated useful lives of the respective assets.
Depreciation is computed on a straight-line basis for Ñnancial reporting purposes and on an accelerated basis
for income tax purposes. Leasehold improvements are amortized over the lesser of the estimated useful lives of
the assets or the related lease terms. Goodwill and purchased technology, which are included in other assets,
are capitalized at cost and amortized on a straight-line basis over their estimated lives of Ñve to Ñfteen years.
Other intangible assets, including intangibles acquired from IBM pursuant to a joint technology development
agreement (See Note 4), are amortized over their expected useful lives or the lives of the related products.
The Company reviews identiÑable intangibles, goodwill and other long-lived assets for impairment
whenever events or circumstances indicate the carrying amounts may not be recoverable. If the sum of the
expected future cash Öows (undiscounted and without interest charges) is less than the carrying amount of an
asset, an impairment loss is recognized.
Revenue Recognition
The Company recognizes revenue at time of shipment, net of pricing adjustments and estimated sales
returns. In accordance with standard industry practice, the Company's agreements with certain resellers
provide price protection for inventories held by the resellers at the time of published list price reductions and,
under certain circumstances, stock rotation for slow-moving items. These agreements may be terminated upon
written notice by either party. In the event of termination, the Company may be obligated to repurchase a
certain portion of the resellers' inventory. The Company recognizes revenue at the time of shipment on sales to
resellers who have inventory repurchase agreements due to the Company's ability to reasonably estimate
future returns as well as the historically low levels of actual repurchases. Revenue recognized on sales to
resellers with inventory repurchase agreements was $1,083, $841, and $683 million for Ñscal years 1998, 1999
and 2000, respectively. Repurchases of inventory under such agreements were not material in 1998, 1999 and
2000.
Warranty
The Company records an accrual for estimated warranty costs when revenue is recognized. Warranty
covers cost of repair or replacement of the hard drive and the warranty periods range from 1 to 3 years for all
hard drives, except enterprise drives, which had a warranty period of 5 years. The Company has comprehen-
sive processes with which to estimate accruals for warranty, which include speciÑc detail on hard drives in the
Ñeld by product type, historical Ñeld return rates and costs to repair. Although the Company believes that it
has the continued ability to reasonably estimate warranty reserves, unforeseeable changes in factors used to
estimate the accrual for warranty could occur. These unforeseeable changes could cause a material change in
the Company's warranty accrual estimate. Such a change would be recorded in the period in which the change
was identiÑed.
The Company increased warranty accruals from 1998 to 1999 primarily due to a normal increase in units
under warranty and the completion of the Company's transition in its desktop product line from thin-Ñlm to
the newer magnetoresistive head technology in the June 1998 quarter. This transition and experience with thin
Ñlm returns, which indicated a higher return rate, higher cost of repair and longer duration of returns within
the warranty period, resulted in an increase in warranty accruals. Prior to 1999, the Company's experience
with returns of older generation thin-Ñlm products was that a large percentage of the products which were
going to fail, failed in the Ñrst six months after sale. However, with the advancements in thin-Ñlm recording
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