Apple 2014 Annual Report Download - page 43

The industries in which the Company competes are subject to a rapid and unpredictable pace of product and component
obsolescence and demand changes. In certain circumstances the Company may be required to record additional write-downs
of inventory, inventory prepayments and/or manufacturing-related capital assets. These circumstances include future demand
or market conditions for the Company’s products being less favorable than forecasted, unforeseen technological changes or
changes to the Company’s product development plans that negatively impact the utility of any of these assets, or significant
deterioration in the financial condition of one or more of the Company’s suppliers that hold any of the Company’s
manufacturing process equipment or to whom the Company has made an inventory prepayment. Such write-downs would
adversely affect the Company’s 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 in each case based on projected demand. Where appropriate, the
purchases are applied to inventory component prepayments that are outstanding with the respective supplier. Purchase
commitments typically cover the Company’s forecasted component and manufacturing 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, if the Company’s
product development plans change, or if there is an unanticipated change in technological requirements for any of the
Company’s products, then the Company may be required to record additional accruals for cancellation fees that would
adversely 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 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 re-evaluates these 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 liabilities 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.
Apple Inc. | 2014 Form 10-K | 41