Western Digital 2003 Annual Report Download - page 46

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
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 original
equipment manufacturer (""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 revenue for 2001 of
$13.1 million, of which $16.9 million had previously been recorded in 2000. The cumulative eÅect on the 2001 net loss
of this accounting change was $1.5 million.
In accordance with standard industry practice, the Company's agreements with certain resellers (including
distributors and retailers) 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
$1.3 billion, $1.0 billion and $1.0 billion for 2003, 2002 and 2001, respectively. Repurchases of reseller inventory were
not material in 2003, 2002 and 2001.
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 one to Ñve years and is recorded in the
accompanying balance sheet as current or long term based upon when the expenditure is expected to occur. 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 $3.4 million, $6.0 million and $7.4 million in 2003, 2002 and 2001, 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 10).
Per Share Information
The Company computes basic income (loss) per share using the net income (loss) and the weighted average
number of common shares outstanding during the period. Diluted income (loss) per share is computed using the net
income (loss) and the weighted average number of common shares and dilutive potential common shares outstanding
during the period. Dilutive potential common shares include outstanding employee stock options, employee stock
purchase plan shares and restricted stock awards.
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