Western Digital 2006 Annual Report Download - page 58

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Inventory Valuation
The Company values inventory at the lower of cost (first-in, first-out basis) or net realizable value. Inventory write-
downs are recorded for the valuation of inventory at the lower of cost or net realizable value by analyzing market
conditions and estimates of future sales prices as compared to inventory costs and inventory balances. The Company
evaluates inventory balances for excess quantities and obsolescence on a regular basis by analyzing backlog, estimated
demand, inventory on hand, sales levels and other information, and reduces inventory balances to net realizable value for
excess and obsolete inventory based on this analysis.
Property and Equipment
The cost of property and equipment is depreciated over the estimated useful lives of the respective assets. The
Company’s buildings are being depreciated over periods ranging from fifteen to thirty years. The majority of the
Company’s equipment is being depreciated over periods of three to seven years. Depreciation is computed on a straight-
line basis. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the related
lease terms.
Intangible Assets
Intangible assets consist of purchased technology acquired during the 2004 Read-Rite Corporation asset acquisition
(See Note 4). These assets are being amortized over a weighted average period of three years.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition in Financial Statements.” Under SAB No. 104, revenue is recognized when the title and risk of loss have
passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred, or services have been
rendered, the sales price is fixed or determinable and collectibility is reasonably assured. The Company establishes
provisions against revenue and cost of revenue for estimated sales returns in the same period that the related revenue is
recognized based on existing product return notifications.
In accordance with standard industry practice, the Company has agreements with resellers that provide limited price
protection for inventories held by resellers at the time of published list price reductions and other incentive programs.
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 records a reduction to revenue for
estimated price protection and other programs in effect until the resellers sell such inventory to their customers. These
adjustments are based on anticipated price decreases during the reseller holding period, estimated amounts to be
reimbursed to qualifying customers, as well as historical pricing information. If end-market demand for hard drives
declines significantly, the Company may have to increase sell-through incentive payments to resellers, resulting in an
increase in price protection allowances, which could adversely impact operating results. Net revenue recognized on sales
to resellers was approximately $2.0 billion, $1.5 billion and $1.5 billion in 2006, 2005 and 2004, respectively.
Repurchases of reseller inventory were not material in 2006, 2005 or 2004.
Western Digital establishes an allowance for doubtful accounts by analyzing specific customer accounts and
assessing the risk of loss based on insolvency, disputes or other collection issues. In addition, the Company routinely
analyzes the different receivable aging categories and its bad debt loss history and establishes reserves based on a
combination of past due receivables and expected future losses based primarily on the Company’s historical levels of bad
debt losses. If the financial condition of a significant customer deteriorates resulting in its inability to pay its accounts
when due, or if the overall loss history of the Company changes significantly, an adjustment in the Company’s allowance
for doubtful accounts would be required, which could affect operating results.
52
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)