Western Digital 2010 Annual Report Download - page 65

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 prepare estimates and assist the
Company in exercising judgment in determining the underlying estimates. The statistical tracking model captures
specific detail on hard drive reliability, such as factory test data, historical field return rates, and costs to repair by product
type. Management’s judgment is subject to a greater degree of subjectivity with respect to newly introduced products
because of limited field experience with those products upon which to base warranty estimates. Management reviews the
warranty accrual quarterly for products shipped in prior periods and which are still under warranty. Any changes in the
estimates underlying the accrual may materially affect operating results. Such changes are generally a result of differences
between forecasted and actual return rate experience and costs to repair. If actual product return trends, costs to repair
returned products or costs of customer compensatory claims differ significantly from estimates, future results of
operations could be materially affected.
Litigation and Other Contingencies
The Company discloses material contingencies deemed to be reasonably possible and accrues loss contingencies
when, in consultation with legal advisors, the Company concludes that a loss is probable and reasonably estimable. 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. See Note 5.
Advertising Expense
Advertising costs are expensed as incurred. Selling, general and administrative expenses of the Company included
advertising costs of $7 million, $5 million, and $3 million in 2010, 2009 and 2008, respectively.
Income Taxes
The Company accounts 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
assets and liabilities and expected benefits of utilizing net operating loss (“NOL”) and tax credit carryforwards. The
Company records a valuation allowance when it is more likely than not that the deferred tax assets will not be realized.
Each period, the Company evaluates the need for a valuation allowance for its deferred tax assets and adjusts the valuation
allowance so that the Company records net deferred tax assets only to the extent that it has concluded it is more likely
than not that these deferred tax assets will be realized.
The Company recognizes liabilities for uncertain tax positions based on a two-step process. 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 the
provision for income taxes. The actual liability for unrealized tax benefit in any such contingency may be materially
different from the Company’s 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 and materially affect our
operating results.
Income per Common Share
The Company computes basic income per common share using net income and the weighted average number of
common shares outstanding during the period. Diluted income per common share is computed using net income and the
weighted average number of common shares and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares include certain dilutive outstanding employee stock options, rights to purchase
shares of common stock under the Company’s Employee Stock Purchase Plan (“ESPP”) and restricted stock unit awards.
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)