Apple 2011 Annual Report Download - page 30

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The Company records reductions to revenue for estimated commitments related to price protection and for customer incentive programs,
including reseller and end-user rebates, and other sales programs and volume-
based incentives. For transactions involving price protection, the
Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably estimated
and the other conditions for revenue recognition have been met. The Company’
s policy requires that, if refunds cannot be reliably estimated,
revenue is not recognized until reliable estimates can be made or the price protection lapses. For customer incentive programs, the estimated cost
of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered.
The Company also records reductions to revenue for expected future product returns based on the Company’
s historical experience. Future
market conditions and product transitions may require the Company to increase customer incentive programs and incur incremental price
protection obligations that could result in additional reductions to revenue at the time such programs are offered. Additionally, certain customer
incentive programs require management to estimate the number of customers who will actually redeem the incentive. Management’
s estimates
are based on historical experience and the specific terms and conditions of particular incentive programs. If a greater than estimated proportion
of customers redeem such incentives, the Company would be required to record additional reductions to revenue, which would have a negative
impact on the Company’s results of operations.
Valuation and Impairment of Marketable Securities
The Company’s investments in available-for-
sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair
value of securities are recognized in accumulated other comprehensive income, net of tax, in the Company’
s Consolidated Balance Sheets.
Changes in the fair value of available-for-sale securities impact the Company’s net income only when such securities are sold or an other-than-
temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification of each
security’s cost basis. The Company regularly reviews its investment portfolio to determine if any security is other-than-
temporarily impaired,
which would require the Company to record an impairment charge in the period any such determination is made. In making this judgment, the
Company evaluates, among other things, the duration and extent to which the fair value of a security is less than its cost, the financial condition
of the issuer and any changes thereto, and the Company’
s intent to sell, or whether it is more likely than not it will be required to sell, the
security before recovery of the its amortized cost basis. The Company’s assessment on whether a security is other-than-
temporarily impaired,
could change in the future due to new developments or changes in assumptions related to any particular security.
Inventory Valuation and Inventory Purchase Commitments
The Company must order components for its products and build inventory in advance of product shipments. The Company records a write-
down
for inventories of components and products, including third-
party products held for resale, which have become obsolete or are in excess of
anticipated demand or net realizable value. The Company performs a detailed review of inventory each fiscal quarter that considers multiple
factors including demand forecasts, product life cycle status, product development plans, current sales levels, and component cost trends. The
industries in which the Company competes are subject to a rapid and unpredictable pace of product and component obsolescence and demand
changes. If future demand or market conditions for the Company’
s products are less favorable than forecasted or if unforeseen technological
changes negatively impact the utility of component inventory, the Company may be required to record additional write-
downs, which would
negatively affect its results of operations in the period when the write-downs were recorded.
The Company records accruals for estimated cancellation fees related to component orders that have been cancelled or are expected to be
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 up 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
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