HP 2009 Annual Report Download - page 50

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
We are subject to income taxes in the United States and over sixty foreign countries, and we are
subject to routine corporate income tax audits in many of these jurisdictions. We believe that our tax
return positions are fully supported, but tax authorities are likely to challenge certain positions, which
may not be fully sustained. However, our income tax expense includes amounts intended to satisfy
income tax assessments that result from these challenges. Determining the income tax expense for these
potential assessments and recording the related assets and liabilities requires management judgments
and estimates. We evaluate our uncertain tax positions in accordance with the guidance for accounting
for uncertainty in income taxes. We believe that our reserve for uncertain tax positions, including
related interest, is adequate. The amounts ultimately paid upon resolution of audits could be materially
different from the amounts previously included in our income tax expense and therefore could have a
material impact on our tax provision, net income and cash flows. Our reserve for uncertain tax
positions is attributable primarily to uncertainties concerning the tax treatment of our international
operations, including the allocation of income among different jurisdictions, and related interest. We
review our reserves quarterly, and we may adjust such reserves because of proposed assessments by tax
authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously
unavailable information obtained during the course of an examination, negotiations between tax
authorities of different countries concerning our transfer prices, execution of Advanced Pricing
Agreements, resolution with respect to individual audit issues, the resolution of entire audits, or the
expiration of statutes of limitations.
Allowance for Doubtful Accounts
We determine our allowance for doubtful accounts using a combination of factors to ensure that
we have not overstated our trade and financing receivables balances due to uncollectibility. We
maintain an allowance for doubtful accounts for all customers based on a variety of factors, including
the use of third-party credit risk models that generate quantitative measures of default probabilities
based on market factors, the financial condition of customers, the length of time receivables are past
due, trends in overall weighted-average risk rating of the total portfolio, macroeconomic conditions,
significant one-time events and historical experience. Also, we record specific provisions for individual
accounts when we become aware of specific customer circumstances, such as in the case of bankruptcy
filings or deterioration in the customer’s operating results or financial position. If circumstances related
to customers change, we would further adjust our estimates of the recoverability of receivables either
upward or downward. The annual general provision for doubtful accounts has averaged approximately
0.06% of net revenue over the last three fiscal years. Using our third-party credit risk model at
October 31, 2009, a 50-basis-point deterioration in the weighted-average default probabilities of our
significant customers would have resulted in an approximately $36 million increase to our trade
allowance at the end of fiscal year 2009.
Inventory
We state our inventory at the lower of cost or market. We make adjustments to reduce the cost of
inventory to its net realizable value, if required, at the product group level for estimated excess,
obsolescence or impaired balances. Factors influencing these adjustments include changes in demand,
rapid technological changes, product life cycle and development plans, component cost trends, product
pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if
these factors differ from our estimates.
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