Motorola 2008 Annual Report Download - page 76

specific objective evidence of the fair value of the undelivered element(s), and (iii) general revenue recognition
criteria related to the delivered element(s) have been met.
Changes in cost estimates and the fair values of certain deliverables could negatively impact the Company’s
operating results. In addition, unforeseen conditions could arise over the contract term that may have a significant
impact on operating results.
Inventory Valuation
The Company records valuation reserves on its inventory for estimated excess or obsolescence. The amount of
the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon
assumptions about future demand and market conditions. On a quarterly basis, management in each segment
performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence.
Management uses its best judgment to estimate appropriate reserves based on this analysis. In addition, the
Company adjusts the carrying value of inventory if the current market value of that inventory is below its cost.
At December 31, 2008 and 2007, Inventories consisted of the following:
December 31 2008 2007
Finished goods $1,710 $1,737
Work-in-process and production materials 1,709 1,470
3,419 3,207
Less inventory reserves (760) (371)
$2,659 $2,836
The Company balances the need to maintain strategic inventory levels to ensure competitive delivery
performance to its customers against the risk of inventory obsolescence due to rapidly changing technology and
customer requirements. As reflected above, the Company’s inventory reserves represented 22% of the gross
inventory balance at December 31, 2008, compared to 12% of the gross inventory balance at December 31, 2007.
The increase in the inventory reserves was primarily due to the Company recording a charge of $291 million for
excess inventory due to a decision to consolidate software and silicon platforms in the Mobile Devices segment in
2008. The Company has inventory reserves for pending cancellations of product lines due to technology changes,
long-life cycle products, lifetime buys at the end of supplier production runs, business exits, and a shift of
production to outsourcing.
If actual future demand or market conditions are less favorable than those projected by management,
additional inventory writedowns may be required.
Income Taxes
The Company’s effective tax rate is based on pre-tax income and the tax rates applicable to that income in the
various jurisdictions in which the Company operates. An estimated effective tax rate for a year is applied to the
Company’s quarterly operating results. In the event that there is a significant unusual or discrete item recognized,
or expected to be recognized, in the Company’s quarterly operating results, the tax attributable to that item would
be separately calculated and recorded at the same time as the unusual or discrete item. The Company considers the
resolution of prior-year tax matters to be such items. Significant judgment is required in determining the
Company’s effective tax rate and in evaluating its tax positions. The Company establishes reserves when it is more
likely than not that the Company will not realize the full tax benefit of the position. The Company adjusts these
reserves in light of changing facts and circumstances.
Tax regulations may require items of income and expense to be included in a tax return in different periods
than the items are reflected in the consolidated financial statements. As a result, the effective tax rate reflected in
the consolidated financial statements may be different than the tax rate reported in the income tax return. Some of
these differences are permanent, such as expenses that are not deductible on the tax return, and some are
temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and
liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax
return in future years for which the Company has already recorded the tax benefit in the consolidated financial
statements. Deferred tax liabilities generally represent tax expense recognized in the consolidated financial
68 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS