Western Digital 2006 Annual Report Download - page 48

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Stock-Based Compensation
We account for all stock-based compensation in accordance with the fair value recognition provisions of
SFAS No. 123-R, “Share-Based Payment”. Under these provisions, stock-based compensation cost is measured at
the grant date based on the value of the award and is recognized as expense over the vesting period. Under
SFAS No. 123-R, we are required to use judgment in estimating the amount of stock-based awards that are expected
to be forfeited. If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and
our results of operations could be materially impacted.
Prior to the adoption of SFAS No. 123-R, we accounted for stock-based employee compensation plans (including
shares issued under our stock option plans and ESPP) in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” and its related interpretations (“APB No. 25”), and followed the pro forma
net income, pro forma income per share, and stock-based compensation plan disclosure requirements set forth in
SFAS No. 123, “Accounting for Stock-Based Compensation.” All other types of equity awards were previously accounted
for in accordance with SFAS No. 123.
The fair values of all stock options granted subsequent to April 1, 2005, were estimated using a binomial model and
the fair values of all options granted prior to April 1, 2005, and all ESPP shares were estimated using the Black-Scholes-
Merton option pricing model. Both the binomial and the Black-Scholes-Merton models require the input of highly
subjective assumptions.
New Accounting Standards
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income
Taxes, an interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.”
FIN No. 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition. The interpretation applies to all tax positions related to income taxes subject to SFAS No. 109. FIN No. 48
is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN No. 48 and the amounts reported after adoption should be
accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are currently
evaluating the impact the adoption of FIN No. 48 could have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in U.S. generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the
impact the adoption of SFAS No. 157 could have on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosure About Foreign Currency Risk
Although the majority of our transactions are in U.S. Dollars, some transactions are based in various foreign
currencies. We purchase short-term, forward exchange contracts to hedge the impact of foreign currency fluctuations on
certain underlying assets, liabilities and commitments for operating expenses and product costs denominated in foreign
currencies. The purpose of entering into these hedge transactions is to minimize the impact of foreign currency
fluctuations on our results of operations. The contract maturity dates do not exceed six months. We do not purchase
short-term forward exchange contracts for trading purposes. Currently, we focus on hedging our foreign currency risk
related to the Thai Baht, the Euro and the British Pound Sterling. Thai Baht contracts are designated as cash flow hedges.
All other contracts are designated as fair value hedges. See Part II, Item 8, Note 1 in the Notes to Consolidated Financial
Statements, included in this Annual Report on Form 10-K.
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