Western Digital 2009 Annual Report Download - page 80

Adoption of FIN 48
Effective as of June 30, 2007, the Company adopted the provisions of FIN 48. FIN 48 contains a two-step approach
to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for
Income Taxes.” First, the tax position is evaluated for recognition by determining if it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If the tax
position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of
benefit to be recognized in the financial statements. The amount of the benefit that may be recognized is the largest
amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
The adoption of FIN 48 at the beginning of fiscal year 2008 did not result in an adjustment for unrecognized tax
benefits. The total amount of gross unrecognized tax benefits as of the date of adoption was $58 million which had
previously been presented as a reduction to deferred tax assets of $47 million and an inclusion in other long term
liabilities of $11 million as of June 29, 2007. With the exception of certain unrecognized tax benefits that are directly
associated with the tax position taken, unrecognized tax benefits are presented gross in the Company’s balance sheet.
Interest and penalties related to unrecognized tax benefits are recognized on liabilities recorded for uncertain tax
positions and are recorded in the provision for income taxes. As of the date of adoption of FIN 48, and at July 3, 2009,
such interest and penalties were not material.
As of July 3, 2009 the Company had approximately $136 million of unrecognized tax benefits.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the year ended July 3,
2009 (in millions):
Unrecognized tax benefit at June 27, 2008 ....................................... $107
Gross increases related to prior year tax positions ................................... 6
Gross decreases related to prior year tax positions ................................... (4)
Gross increases related to current year tax positions ................................. 27
Settlements/lapse of statute of limitations ........................................ —
Unrecognized tax benefit at July 3, 2009......................................... $136
The entire balance of unrecognized tax benefits at July 3, 2009, if recognized, would affect the effective tax rate.
The Company files U.S. federal, U.S. state, and foreign tax returns. For federal tax returns, the Company is subject
to examination for fiscal years 2006 through 2009. For state returns, with few exceptions, the Company is subject to tax
examinations for 2005 through 2009. In foreign jurisdictions, with few exceptions, the Company is subject to
examination for all years subsequent to fiscal 2000. The Company is no longer subject to examination by the Internal
Revenue Service (“IRS”) for periods prior to 2006 and by the state taxing authorities for periods prior to 2005, although
carry forwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing
authority if they either have been or will be used in a subsequent period.
The IRS has commenced an examination of the fiscal years ended 2006 and 2007 for the Company and calendar
years 2005 and 2006 for Komag. Additionally, the Company’s French subsidiary is under examination by the local tax
authorities for fiscal years 2003 through 2005.
Due to the risk that audit outcomes and the timing of audit settlements are subject to significant uncertainty, the
Company’s current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open tax
years. As of July 3, 2009, it is not possible to estimate the amount of change, if any, in the unrecognized tax benefits that
is reasonably possible within the next twelve months. Any significant change in the amount of the Company’s
unrecognized tax benefits would most likely result from additional information or settlements relating to the Company’s
tax examination of uncertain tax positions.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)