Western Digital 2011 Annual Report Download - page 48

outcome of such matters could differ materially from management’s estimates. Refer to Part II, Item 8, Note 5 in the
Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K.
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 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 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 recognize 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 our provision for income
taxes. The actual liability for unrealized tax benefits 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 and materially affect our operating results.
Stock-based Compensation
We account for all stock-based compensation at fair value. 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”)
purchase rights 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. 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 affected.
Recent Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including the respective dates of
adoption and expected effects on our results of operations and financial condition, refer to Part II, Item 8, Note 1 of the
Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated by
reference in response to this item.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosure About Foreign Currency Risk
Although the majority of our transactions are in U.S. dollars, some transactions are based in various foreign
currencies. We purchase short-term, foreign exchange contracts to hedge the impact of foreign currency exchange
fluctuations on certain underlying assets, revenue, liabilities and commitments for operating expenses and product costs
denominated in foreign currencies. The purpose of entering into these hedge transactions is to minimize the impact of
foreign currency fluctuations on our results of operations. The contract maturity dates do not exceed 12 months. We do
not purchase foreign exchange contracts for trading purposes. Currently, we focus on hedging our foreign currency risk
related to the Thai Baht, Malaysian Ringgit, Euro and British Pound Sterling. Thai Baht contracts are designated as
either cash flow or fair value hedges. Malaysian Ringgit contracts are designated as cash flow hedges. Euro and British
Pound Sterling contracts are designated as fair value hedges. See Part II, Item 8, Notes 1 and 11 in the Notes to
Consolidated Financial Statements, included in this Annual Report on Form 10-K.
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