Western Digital 2009 Annual Report Download - page 53

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 material 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 in 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 when it is more likely than not that the deferred tax assets will not be realized. Each quarter 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 recognize liabilities for uncertain tax positions based on the two-step process prescribed in Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an interpretation of
FASB Statement No. 109.” To the extent a tax position does not meet a more-likely-than-not level of certainty, no benefit
is recognized in the financial statements. If a position meets the more-likely-than-not level of certainty, it is recognized in
the financial statements at the largest amount that has a greater than 50% likelihood of being realized upon ultimate
settlement. Interest and penalties related to unrecognized tax benefits are recognized on liabilities recorded for uncertain
tax positions and are recorded in our provision for income taxes. The actual liability for unrealized tax benefit in any such
contingency may be materially different from our estimates, which could result in the need to record additional liabilities
for unrecognized tax benefits or potentially adjust previously recorded liabilities for unrealized tax benefits.
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” (“SFAS 123(R)”). 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. The fair
values of all stock options granted are estimated using a binomial model, and the fair values of all Employee Stock
Purchase Plan (“ESPP”) shares are 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. Under SFAS 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.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes
a framework for measuring fair value under U.S. GAAP and expands disclosures about fair value measurement. In
February 2008, FASB issued FASB Staff Position 157-2, “Effective Date of FASB Statement 157” (“FSP 157-2”), which
delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after
November 15, 2008 and interim periods within those years, which for us is the first quarter of fiscal 2010. The partial
adoption of SFAS 157 for financial assets and financial liabilities in our first quarter of fiscal 2009 did not have a material
impact on our consolidated financial statements. We are currently evaluating the impact the adoption of SFAS 157 will
have on the non-financial assets and non-financial liabilities in our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.
47