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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
on Derivative Instruments and Hedging Activities.'' SFAS 133, as amended, establishes accounting and reporting
standards for derivative instruments embedded in other contracts and for hedging activities. The Company had
outstanding forward exchange contracts with commercial banks for the Thai Baht, British Pound Sterling and Euro with
values of $151.4 million and $173.7 million at July 1, 2005 and July 2, 2004, respectively. Thai Baht contracts are
designated as cash flow hedges under SFAS No. 133 while all other contracts are designated as fair value hedges under
Statement of Financial Accounting Standards No. 52 ""Foreign Currency Translation.'' Changes in fair value on these
contracts were not material to the consolidated financial statements for all years presented.
Use of Estimates
Company management has made estimates and assumptions relating to the reporting of certain assets and liabilities
in conformity with generally accepted accounting principles. These estimates and assumptions have been applied using
methodologies, which are consistent throughout the periods presented. However, actual results could differ from these
estimates.
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation, including the
following (in millions):
Current Previous
2004 Classification Classification
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $345.5 $377.8
Short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.3 Ì
50