Western Digital 2009 Annual Report Download - page 65

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Goodwill and Other Long-Lived Assets
In accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”), the total purchase price in a business
combination is allocated to the fair value of assets acquired and liabilities assumed based on their fair values at the
acquisition date, with amounts exceeding the fair values being recorded as goodwill. In accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets”, goodwill is not amortized. Instead, it is tested for impairment on an annual
basis or more frequently whenever events or changes in circumstances indicate that goodwill may be impaired. The
Company did not record any impairment of goodwill during 2009.
Other intangible assets consist of technology acquired in business combinations. Acquired intangibles are
amortized on a straight-line basis over their respective estimated useful lives. In accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), long-lived assets are tested for
recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
The Company recorded impairments to certain long-lived assets during 2009. See Note 13.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition in Financial Statements” (“SAB No. 104”). 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 collectability 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. If actual sales returns exceed expectations, an
increase in the sales return accrual would be required, which could negatively affect operating results.
In accordance with standard industry practice, the Company provides resellers with limited price protection for
inventories held by resellers at the time of published list price reductions and other sales incentive programs. In
accordance with current accounting standards, the Company recognizes revenue upon delivery to OEMs, ODMs and
resellers and records a reduction of revenue for estimated price protection and other programs in effect until the resellers
sell such inventory to their customers. The Company bases these adjustments on several factors, including anticipated
price decreases during the reseller holding period, reseller’s sell-through and inventory levels, estimated amounts to be
reimbursed to qualifying customers, historical pricing information and customer claim processing. If customer demand
for hard drives or market conditions differ from the Company’s expectations, the Company’s operating results could be
affected. The Company also has programs under which it reimburses qualified distributors and retailers for certain
marketing expenditures which are recorded as a reduction of revenue. The Company applies the provisions of Emerging
Issues Task Force No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor’s Products),” and such sales incentive and marketing programs are recorded as a reduction of revenue.
The Company records 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 establishes reserves based on a combination of past due receivables and expected
future losses based primarily on its 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 Company’s overall loss history changes
significantly, an adjustment in the Company’s allowance for doubtful accounts would be required, which could affect
operating results.
Warranty
The Company records an accrual for estimated warranty costs when revenue is recognized. The Company generally
warrants its products for a period of one to five years. The warranty provision considers estimated product failure rates
and trends, estimated repair or replacement costs and estimated costs for customer compensatory claims related to
product quality issues, if any. A statistical warranty tracking model is used to help with estimates and assists in exercising
59
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)