Apple 2005 Annual Report Download - page 32

The Company accrues necessary reserves for cancellation fees related to component orders that have been cancelled. Consistent with industry
practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected
demand information. These commitments typically cover the Company’s requirements for periods ranging from 30 to 150 days. If there is an
abrupt and substantial decline in demand for one or more of the Company’s products or an unanticipated change in technological requirements
for any of the Company’s products, the Company may be required to record additional reserves for cancellation fees that would negatively
affect gross margins in the period when the cancellation fees are identified.
Warranty Costs
The Company provides currently for the estimated cost for product warranties at the time the related revenue is recognized based on historical
and projected warranty claim rates, historical and projected cost-per-claim, and knowledge of specific product failures that are outside of the
Company’s typical experience. Each quarter, the Company reevaluates its estimates to assess the adequacy of its recorded warranty liabilities
considering the size of the installed base of products subject to warranty protection, and adjusts the amounts as necessary. If actual product
failure rates or repair costs differ from estimates, revisions to the estimated warranty liability would be required and could negatively affect the
Company’s results of operations.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes , the provision for income taxes is computed using the asset
and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.
Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which
those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount
that is believed more likely than not to be realized. The Company is currently evaluating the repatriation provisions of the American Jobs
Creation Act of 2004, which, if implemented by the Company, would affect the Company’
s tax provision and deferred tax assets and liabilities.
Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax
planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax
assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation
allowance would be charged to earnings in the period such determination is made. Similarly, if the Company subsequently realizes deferred tax
assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive
adjustment to earnings or a decrease in goodwill in the period such determination is made. In addition, the calculation of tax liabilities involves
significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a
manner inconsistent with management’s expectations could have a material impact on the Company’s results of operations and financial
position.
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