Western Digital 2007 Annual Report Download - page 47

changes in the estimates underlying the accrual may result in adjustments that impact current period gross margin and
income. Such changes are generally a result of differences between forecasted and actual return rate experience and costs to
repair. For a summary of historical changes in estimates related to pre-existing warranty provisions, refer to Part II,
Item 8, Note 4 of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K.
Inventory
We value inventories at the lower of cost (first-in, first-out basis) or net realizable value. We record inventory write-
downs 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.
We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing estimated
demand, inventory on hand, sales levels and other information, and reduce inventory balances to net realizable value for
excess and obsolete inventory based on this analysis. Unanticipated changes in technology or customer demand could
result in a decrease in demand for one or more of our products, which may require an increase in inventory balance
adjustments that could negatively affect operating results.
Litigation and Other Contingencies
We apply SFAS No. 5, “Accounting for Contingencies,” to determine when and how much to accrue for and disclose
related to legal and other contingencies. Accordingly, we disclose contingencies deemed to be reasonably possible and
accrue loss contingencies when, in consultation with our legal advisors, we conclude that a loss is probable and reasonably
estimable (Refer to Part II, Item 8, Note 5 of the Notes to Consolidated Financial Statements, included in this Annual
Report on Form 10-K). The ability to predict the ultimate outcome of such matters involves judgments, estimates and
inherent uncertainties. The actual outcome of such matters could differ materially from management’s estimates.
Income Taxes
We account for income taxes under the asset and liability method, which provides that deferred tax assets and
liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of our assets and
liabilities and expected benefits of utilizing net operating loss (“NOL”) and tax credit carryforwards. We record a
valuation allowance where it is more likely than not that the deferred tax assets will not be realized. Each period we
evaluate the need for a valuation allowance for our deferred tax assets and we adjust the valuation allowance so that we
record net deferred tax assets only to the extent that we conclude it is more likely than not that these deferred tax assets
will be realized.
We record estimated liabilities for tax uncertainties. To the extent a tax position does not meet a probable level of
certainty, a liability is established based on the best estimate of the amount that will not be sustained. However, the actual
liability in any such contingency 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.
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.
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