background image
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
expected future losses based primarily on its historical levels of bad debt losses. If the financial condition of a sig-
nificant 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 materially 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 replacement costs, estimated repair costs which include scrap 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 war-
ranty 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 result in adjustments that impact current
period gross profit and income. 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
When the Company becomes aware of a claim or potential claim, the Company assesses the likelihood of any loss
or exposure. The Company discloses information regarding each material claim where the likelihood of a loss con-
tingency is probable or reasonably possible. If a loss contingency is probable and the amount of the loss can be reason-
ably estimated, the Company records an accrual for the loss. In such cases, there may be an exposure to potential loss
in excess of the amount accrued. Where a loss is not probable but is reasonably possible or where a loss in excess of the
amount accrued is reasonably possible, the Company discloses an estimate of the amount of the loss or range of possi-
ble losses for the claim if a reasonable estimate can be made, unless the amount of such reasonably possible losses is
not material to the Company's financial position, results of operations or cash flows. The ability to predict the ulti-
mate 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 $61 million, $30 million and $11 million in 2013, 2012 and 2011, 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 valu-
ation 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
63