Dell 2008 Annual Report Download - page 51

Table of Contents
based on historical experience of failure rates. If actual results differ from our estimates, we revise our estimated warranty liability to reflect such
changes. Each quarter, we reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
Income Taxes — We calculate a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are
recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In determining the
future tax consequences of events that have been recognized in our financial statements or tax returns, judgment is required. Differences between the
anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated results of operations or financial
position. Additionally, we use tax planning strategies as a part of our global tax compliance program. Judgments and interpretation of statutes are
inherent in this process. We provide related valuation reserves, where appropriate, in accordance with FIN 48.
Stock-Based Compensation — Effective February 4, 2006, stock-based compensation expense is recorded based on the grant date fair value estimate
in accordance with the provisions of SFAS 123(R). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the
SEC's interpretation of SFAS 123(R) and the valuation of share-based payments for public companies. We have applied the provisions of SAB 107
in our adoption of SFAS 123(R). Note 5 of Notes to Consolidated Financial Statements included in "Part II — Item 8 — Financial Statements and
Supplementary Data" for further discussion of stock-based compensation.
SFAS 123(R) requires the use of a valuation model to calculate the fair value of stock option awards. We have elected to use the Black-Scholes
option pricing model, which incorporates various assumptions, including volatility, expected term, and risk-free interest rates. The volatility is based
on a blend of implied and historical volatility of our common stock over the most recent period commensurate with the estimated expected term of
our stock options. We use this blend of implied and historical volatility, as well as other economic data, because we believe such volatility is more
representative of prospective trends. The expected term of an award is based on historical experience and on the terms and conditions of the stock
awards granted to employees. The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to
pay cash dividends.
The cost of restricted stock awards is determined using the fair market value of our common stock on the date of grant.
Loss Contingencies — We are subject to the possibility of various losses arising in the ordinary course of business. We consider the likelihood of
loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss
contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the
amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be
adjusted and whether new accruals are required. Third parties have in the past and may in the future assert claims or initiate litigation related to
exclusive patent, copyright, and other intellectual property rights to technologies and related standards that are relevant to us. If any infringement or
other intellectual property claim made against us by any third party is successful, or if we fail to develop non-infringing technology or license the
proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and
adversely affected.
Recently Issued and Adopted Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"),
which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for assets and liabilities measured at
fair value. SFAS 157 applies to existing accounting pronouncements that require fair value measurements; it does not require any new fair value
measurements. We adopted the effective portions of SFAS 157 beginning the first quarter of Fiscal 2009, with no material impact to our financial
results. In February 2008, FASB issued FASB Staff Position ("FSP") 157-2, Effective Date of FASB Statement No. 157 ("FSP 157-2"), which delays
the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of Fiscal 2010. We are currently evaluating the
inputs and techniques used in these measurements, including items such as impairment assessments of fixed assets and goodwill impairment testing.
See Note 2 of Notes to Consolidated Financial Statements included in "Part II — Item 8 — Financial Statements and Supplementary Data" for the
impact of the adoption.
On October 10, 2008, the FASB issued FSP No. FAS 157-3 "Determining the Fair Value of a Financial Asset When the Market for that Asset is Not
Active" ("FSP FAS 157-3"), which clarifies the application of SFAS 157 in a market that is not active. Additional guidance is provided regarding
how the reporting entity's own assumptions should be considered when relevant observable inputs do not exist, how available observable inputs in a
market that is not active should be considered when measuring fair value, and how the use of market quotes should be considered when assessing the
relevance of inputs available to measure fair value. FSP FAS 157-3 became effective
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