HP 2010 Annual Report Download - page 52

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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.
See Note 14 to the Consolidated Financial Statements in Item 8 for a further discussion on taxes
on earnings.
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 provision for doubtful accounts has averaged approximately 0.03% of
net revenue over the last three fiscal years. Using our third-party credit risk model at October 31, 2010,
a 50-basis-point deterioration in the weighted-average default probabilities of our significant customers
would have resulted in an approximately $64 million increase to our trade allowance at the end of fiscal
year 2010.
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.
Fair Value of Financial Instruments
We measure certain financial assets and liabilities at fair value based on valuation techniques using
the best information available, which may include quoted market prices, market comparables, and
discounted cash flow projections. Financial instruments are primarily comprised of time deposits,
money market funds, commercial paper, corporate and other debt securities, equity securities and other
investments in common stock and common stock equivalents and derivative instruments.
Cash Equivalents and Investments: We hold time deposits, money market funds, commercial paper,
other debt securities primarily consisting of corporate and foreign government notes and bonds, and
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