Western Digital 2015 Annual Report Download - page 55

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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 bene-
fits 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
purchase rights are estimated using the Black-Scholes-Merton option-pricing model. We account for stock apprecia-
tion rights (“SARs”) as liability awards based upon our intention to settle such awards in cash. The SARs liability is
recognized for that portion of fair value for the service period rendered at the reporting date. The share-based liability
is remeasured at each reporting date through the requisite service period. 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 origi-
nal estimate, stock-based compensation expense and our results of operations could be materially affected.
Goodwill and Other Long-Lived Assets
The fair value of assets acquired and liabilities assumed in a business acquisition are recognized at the acquisition
date, with amounts exceeding the fair values being recognized as goodwill. 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. We perform our annual impairment test as of the first day of our fiscal fourth quarter.
We either use qualitative factors to determine whether goodwill is more likely than not impaired or we perform a
two-step approach to quantify impairment. If we conclude from the qualitative assessment that goodwill is more
likely than not impaired, we are required to follow a two-step approach to quantify the impairment. We are required
to use judgment when applying the goodwill impairment test, including the identification of reporting units,
assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of
the fair value of each reporting unit. In addition, the estimates used to determine the fair value of each reporting unit
may change based on results of operations, macroeconomic conditions or other factors. Changes in these estimates
could materially affect our assessment of the fair value and goodwill impairment for each reporting unit.
Other intangible assets consist primarily of technology acquired in business combinations and in-process research
and development. In-process research and development is not amortized until the point at which it reaches techno-
logical feasibility. Instead, it is tested for impairment on an annual basis or more frequently whenever events or
changes in circumstances indicate that it may be impaired. Acquired intangibles are amortized on a straight-line basis
over their respective estimated useful lives. Long-lived assets are tested for recoverability whenever events or changes
in circumstances indicate that their carrying amounts may not be recoverable. If impairment is indicated, the
impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
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.
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