Apple 2011 Annual Report Download - page 31

record additional accruals for cancellation fees that would negatively affect its results of operations in the period when the cancellation fees are
identified and recorded.
Warranty Costs
The Company provides for the estimated cost of hardware and software 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 materially
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. 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 recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
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 future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In
the event that the Company determines all or part of the net deferred tax assets are not realizable in the future, the Company will make an
adjustment to the valuation allowance that would be charged to earnings 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 GAAP and complex tax laws.
Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’
s
financial condition and operating results.
Legal and Other Contingencies
As discussed in Part I, Item 3 of this Form 10-K under the heading “Legal Proceedings” and in Note 7, “Commitments and Contingencies”
in
Notes to Consolidated Financial Statements, the Company is subject to various legal proceedings and claims that arise in the ordinary course of
business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is
significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of
management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a
recorded accrual, with respect to loss contingencies. However, the outcome of legal proceedings and claims brought against the Company are
subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of
these legal matters were resolved against the Company in the same reporting period for amounts in excess of management’
s expectations, the
Company’s consolidated financial statements of a particular reporting period could be materially adversely affected.
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