Motorola 2012 Annual Report Download - page 49

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At December 31, 2012 and 2011, Inventories consisted of the following:
December 31 2012 2011
Finished goods $ 244 $ 319
Work-in-process and production materials 432 363
676 682
Less inventory reserves (163)(170)
$ 513 $ 512
We balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our customers
against the risk of inventory obsolescence due to rapidly changing technology and customer requirements. As reflected above,
our inventory reserves represented 24% of the gross inventory balance at December 31, 2012, compared to 25% of the gross
inventory balance at December 31, 2011. We have inventory reserves for excess inventory, 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 outsourced manufacturing.
If future demand or market conditions are less favorable than those projected by management, additional inventory
writedowns may be required.
Income Taxes
Our effective tax rate is based on pre-tax income and the tax rates applicable to that income in the various jurisdictions in
which we operate. An estimated effective tax rate for a year is applied to our quarterly operating results. In the event that there
is a significant unusual or discrete item recognized, or expected to be recognized, in our 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. We
consider the resolution of prior-year tax matters to be such items. Significant judgment is required in determining our effective
tax rate and in evaluating our tax positions. We establish reserves when it is not more-likely-than-not that we will realize the
full tax benefit of the position. We adjust 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 we have already recorded the tax benefit in the consolidated
financial statements. Deferred tax liabilities generally represent tax expense recognized in the consolidated financial statements
for which the tax payment has been deferred or expense for which we have already taken a deduction on an income tax return,
but has not yet been recognized in the consolidated financial statements.
We account for income taxes by recognizing deferred tax assets and liabilities using enacted tax rates for the effect of the
temporary differences between the book and tax basis of recorded assets and liabilities. We make estimates and judgments with
regard to the calculation of certain income tax assets and liabilities. Deferred tax assets are reduced by valuation allowances if,
based on the consideration of all available evidence, it is more-likely-than-not that some portion of the deferred tax asset will
not be realized. Significant weight is given to evidence that can be objectively verified.
We evaluate deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering
available evidence, including historical and projected taxable income and tax planning strategies that are both prudent and
feasible. During 2012, we recorded $60 million of tax benefits related to the reversal of a significant portion of the valuation
allowance established on certain foreign deferred tax assets.
During 2011, we reassessed our valuation allowance requirements taking into consideration the distribution of Motorola
Mobility. We evaluated all available evidence in our analysis, including the historical and projected pre-tax profits generated by
our U.S. operations. We also considered tax planning strategies that are prudent and can be reasonably implemented. Based on
our assessment, we recorded $274 million of tax benefits related to the reversal of a valuation allowance established on U.S.
deferred tax assets. During 2010, the U.S. valuation allowance was reduced by $39 million, primarily for certain of our state tax
carryforwards that we expect to utilize. The U.S. valuation allowance as of December 31, 2012 relates to state tax
carryforwards and deferred tax assets of a U.S. subsidiary that we expect to expire unutilized.
We have a total deferred tax asset valuation allowance of approximately $308 million against gross deferred tax assets of
approximately $4.7 billion as of December 31, 2012, compared to total deferred tax asset valuation allowance of approximately
$366 million against net deferred tax assets of approximately $5.1 billion as of December 31, 2011.