Western Digital 2002 Annual Report Download - page 42

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Intangible Assets
Intangible assets are included in other assets and amortized over their expected useful lives or the lives of the related
products. The Company reviews identiÑable intangibles 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 to the extent that the carrying value of the asset exceeds its fair value.
Revenue Recognition
The Company adopted StaÅ Accounting Bulletin 101, ""Revenue Recognition in Financial Statements''
(""SAB 101''), during its quarter ended June 29, 2001. SAB 101 extends the point at which revenue is recognized to
include the transfer of the risks of ownership. Generally, this occurs at the time of shipment for the Company's OEM
customers, and at the time of delivery for its reseller customers. Accordingly, the Company changed its revenue
recognition policy eÅective July 1, 2000 to recognize revenue on certain product shipments upon delivery rather than
shipment. The accounting change resulted in a net increase to revenues for 2001 of $13.1 million, of which $16.9 million
had previously been recorded in 2000. The cumulative eÅect on prior years' net loss of this accounting change was
$1.5 million.
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. Either party may terminate these agreements upon written notice. 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 delivery to resellers and accrues for estimated pricing adjustments and sales
returns. Net revenue recognized on sales to resellers was approximately $990, $1,016 and $881 million for 2002, 2001
and 2000, respectively. Repurchases of reseller inventory were not material in 2002, 2001 and 2000.
Warranty
The Company records an accrual for estimated warranty costs as products are sold. Warranty covers cost of repair or
replacement of the hard drive during the warranty period, which ranges from 1 to 3 years. The Company has
comprehensive 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.
Advertising Expense
Advertising costs are expensed as incurred. Selling, general and administrative expenses of the Company include
advertising costs of $6.0, $7.4 and $9.0 million in 2002, 2001 and 2000, respectively.
Income Taxes
The Company accounts for income taxes under the liability method, which provides that deferred tax assets and
liabilities be recognized for temporary diÅerences between the Ñnancial reporting basis and the tax basis of the Company's
assets and liabilities and expected beneÑts of utilizing net operating loss (""NOL'') carryforwards. The Company records
a valuation allowance where it is ""more likely than not'' that the deferred tax assets will not be realized. The impact on
deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary diÅerences are
expected to be settled and reÖected in the consolidated Ñnancial statements in the period of enactment (see Note 11).
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