Western Digital 2005 Annual Report Download - page 31

Deferred Tax Assets
Western Digital's deferred tax assets, which consist primarily of net operating loss and tax credit carryforwards, are
fully reserved due to management's determination that it is more likely than not that these assets will not be realized.
This determination is based on the weight of available evidence, the most significant of which is the Company's loss
history in the related tax jurisdictions. Should this determination change in the future, some amount of deferred tax assets
could be recognized, resulting in a tax benefit or a reduction of future tax expense. The Company records estimated tax
liabilities to the extent the contingencies are probable and can be reasonably estimated. However, the actual liability in
any such tax contingencies may be materially different from our estimates, which could result in the need to record
additional tax liabilities or potentially adjust previously recorded tax liabilities.
New Accounting Standards
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 151, ""Inventory Costs, an Amendment of ARB No. 43, Chapter 4'' (SFAS No. 151), which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) and
requires those items be recognized as current period charges regardless of whether they meet the definition of ""so
abnormal''. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not expect the adoption of SFAS No. 151 to have a material impact on its financial statements.
In December 2004, the FASB issued revised statement SFAS No. 123, ""Share-Based Payment''
(SFAS No. 123-R), which supersedes APB Opinion No. 25 and replaces the current SFAS No. 123. SFAS No. 123-R
requires companies to expense the estimated fair value of employee stock options and similar awards and provides
guidance on the valuation methods used in determining the estimated fair value. The provisions of SFAS No. 123-R will
be effective beginning with the Company's first quarter of fiscal year 2006. Under SFAS No. 123-R, compensation
expense for existing awards where the requisite service period has not been completed by the effective date will be
charged to expense over the remaining service period using the same fair value currently calculated for pro forma
disclosure purposes under SFAS No. 123. For fiscal year 2005, the proforma net impact of stock option expense as
reported in footnote 1 to the consolidated financial statements was approximately $25 million. The Company is currently
in the process of determining the impact of SFAS 123-R on its 2006 financial statements. The actual effect of adopting
SFAS 123R will be dependent on several factors including the levels and timing of future share-based payment grants,
the assumed award forfeiture rate and the method of recognizing the fair value of awards over the service period.
In March 2005, the FASB issued FIN 47, ""Accounting for Conditional Asset Retirement Obligations, an
interpretation of FASB Statement No. 143'' (""FIN 47''), which requires an entity to recognize a liability for the fair
value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated.
FIN 47 is effective for fiscal years ending after December 15, 2005. The Company does not expect the adoption of
FIN 47 to have a material impact on its financial statements.
Risk Factors That May Affect Future Results
Declines in average selling prices (""ASPs'') in the hard disk drive industry adversely affect our operating results.
The hard disk drive industry historically has experienced declining ASPs. Although the rate of decline has
moderated in recent years, there can be no assurance that this trend will continue. Our ASPs tend to decline when
competitors lower prices as a result of decreased costs or to absorb excess capacity, liquidate excess inventories, restructure
or attempt to gain market share. Our ASPs also decline when there is a shift in the mix of product sales, and sales of
lower priced products increase relative to those of higher priced products.
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