Apple 2015 Annual Report Download - page 37

The Company accrues for estimated cancellation fees related to inventory 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, a change in the Company’s product development plans, or an unanticipated change
in technological requirements for any of the Company’s products, 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 accrues 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. The Company regularly reviews these estimates to assess the adequacy of its recorded warranty liabilities or the
current 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 financial condition and operating results.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of its reported operating results. 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 and liabilities 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 record 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 Part II, Item 8 of this Form 10-K in the
Notes to Consolidated Financial Statements in Note 10, “Commitments and Contingencies,” 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 for
asserted legal and other claims. However, the outcome of legal proceedings and claims brought against the Company is 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 a reporting period for amounts in excess of management’s expectations, the
Company’s consolidated financial statements for that reporting period could be materially adversely affected.
Apple Inc. | 2015 Form 10-K | 35