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Summary Of Significant Accounting Policies
6 Months Ended
Apr. 29, 2017
Accounting Policies [Abstract]  
Summary Of Significant Accounting Policies
Summary of Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies for the six months ended April 29, 2017, as compared to those disclosed in Brocade’s Annual Report on Form 10-K for the fiscal year ended October 29, 2016.
New Accounting Pronouncements or Updates Recently Adopted
In April 2015, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance on the accounting for fees paid in a cloud computing arrangement if the arrangement was determined to include a software license. This update will not change U.S. GAAP for a customer’s accounting for service contracts. The Company adopted this update in the first quarter of fiscal year 2017 and has elected to apply this update prospectively. There was no material impact on the Company’s financial position, results of operations, or cash flows.
In December 2016, the FASB issued an update to the Codification, Technical Corrections and Improvements. This update includes various amendments to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification. This update is not intended to change U.S. GAAP. The Company adopted this update in the first quarter of fiscal year 2017. There was no material impact on the Company’s financial position, results of operations, or cash flows.
In January 2017, the FASB issued an update to ASC 350, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the goodwill impairment process by eliminating Step 2 from the quantitative goodwill impairment test. Under this update, goodwill is only impaired for the amount the net assets of the reporting unit exceeds its fair value. The impairment loss should not exceed the carrying amount of goodwill, including any impact from tax deductible goodwill. The Company early adopted this update in the second quarter of fiscal year 2017. There was no material impact on the Company’s financial position, results of operations, or cash flows.
Recent Accounting Pronouncements or Updates That Are Not Yet Effective
In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers, that will supersede virtually all existing revenue guidance. Under this new revenue guidance, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. This new revenue guidance should be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment recorded in retained earnings. In August 2015, the FASB issued an update to defer the effective date of this new revenue guidance by one year. This new revenue guidance becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. The Company is currently evaluating the impact of this new revenue guidance on its consolidated financial statements.
In July 2015, the FASB issued an update to ASC 330, Inventory: Simplifying the Measurement of Inventory. Under this update, measurement of inventory is based on the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and disposal. This update does not apply to inventory that is measured using last-in, first-out or the retail inventory method. This update should be applied prospectively and will be adopted by the Company in the first quarter of fiscal year 2018. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued an update to ASC 606, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance for principal versus agent considerations. In April 2016, the FASB issued an update to ASC 606, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued an update to ASC 606, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which clarifies the guidance related to collectibility and non-cash consideration, as well as provides practical expedients for the transition to ASC 606. In December 2016, the FASB issued an update to ASC 606, Revenue from Contracts with Customers: Technical Corrections and Improvements, which clarifies and corrects any unintended application of the new revenue guidance. The Company must adopt these updates with the adoption of ASC 606, Revenue from Contracts with Customers. The Company is currently evaluating the impact of these updates on its consolidated financial statements.
In January 2016, the FASB issued an update to ASC 825, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This update consists of eight provisions that provide guidance on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This update should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and prospectively for equity investments without readily determinable fair values. This update becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. Early adoption is permitted for two of the eight provisions. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASC 842, Leases, that will supersede the existing lease guidance, including on-balance sheet recognition of operating leases for lessees. This new lease guidance should be applied using a modified retrospective approach and will be adopted by the Company in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is currently evaluating the impact of this new lease guidance on its consolidated financial statements.
In March 2016, the FASB issued an update to ASC 718, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This update simplifies certain aspects of the accounting for share-based payment transactions, including income taxes, forfeiture rates, classification of awards, and classification in the statement of cash flows. This update becomes effective in the first quarter of fiscal year 2018. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In June 2016, the FASB issued ASC 326, Financial Instrument—Credit Losses, that will supersede the existing methodology for estimating expected credit losses on certain financial instruments. The new impairment methodology eliminates the probable initial recognition threshold and, instead, estimates the expected credit losses in consideration of past events, current conditions, and forecasted information. This update becomes effective in the first quarter of fiscal year 2021. Early adoption is permitted in the first quarter of fiscal year 2020. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In August 2016, the FASB issued an update to ASC 230, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This update consists of eight provisions that provide guidance on the classification of certain cash receipts and cash payments. If practicable, this update should be applied using a retrospective transition method to each period presented. For the provisions that are impracticable to apply retrospectively, those provisions may be applied prospectively as of the earliest date practicable. This update becomes effective and will be adopted by the Company in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued an update to ASC 740, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. This update requires the recognition of current and deferred income taxes for intra-entity transfers of assets other than inventory. This update should be applied using a modified retrospective approach and becomes effective in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In November 2016, the FASB issued an update to ASC 230, Statement of Cash Flows: Restricted Cash. This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update should be applied using a retrospective transition method and becomes effective in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In January 2017, the FASB issued an update to ASC 805, Business Combinations: Clarifying the Definition of a Business, which clarifies the definition of a business and adds guidance to assist entities with evaluating whether the transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update should be applied prospectively and becomes effective in the first quarter of fiscal year 2019. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued an update to ASC 718, Compensation—Stock Compensation: Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment reward require an entity to apply modification accounting. Under this new guidance, an entity should account for the effects of a modification unless the fair value, vesting conditions, and classification as an equity or liability instrument of the modified award are the same as the original award. This update should be applied prospectively and becomes effective in the first quarter of fiscal year 2019. Early adoption is permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. Cash and cash equivalents are primarily maintained at eight major financial institutions. Deposits held with banks may be redeemed upon demand and may exceed the amount of insurance provided on such deposits.
A majority of the Company’s accounts receivable balance is derived from U.S. dollar-denominated sales to original equipment manufacturer (“OEM”) partners in the computer storage and server industry. As of April 29, 2017, two customers accounted for a combined total of 36% (EMC Corporation (“EMC”), which was acquired by Dell, Inc. on September 7, 2016, combined with direct sales to Dell, Inc. (together, “Dell EMC”) with 23% and Hewlett Packard Enterprise Company (“HPE”) with 13%) of total accounts receivable. As of October 29, 2016, two customers accounted for a combined total of 42% (Dell EMC with 29% and HPE with 13%) of total accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable balances. The Company has established reserves for credit losses and sales allowances.
For the three months ended April 29, 2017, two customers individually accounted for 16% (Dell EMC) and 11% (International Business Machines Corporation) of the Company’s total net revenues for a combined total of 27% of total net revenues. For the three months ended April 30, 2016, two customers individually accounted for 19% (EMC) and 11% (HPE) of the Company’s total net revenues for a combined total of 30% of total net revenues.
The Company currently relies on single and limited sources for multiple key components used in the manufacture of its products. Additionally, the Company relies on multiple contract manufacturers (“CMs”) for the production of its products, including Hon Hai Precision Industry Co., Ltd., Accton Technology Corporation, Universal Scientific Industrial (Shanghai) Co., Ltd., Flextronics Telecom Systems Ltd., Cape EMS Manufacturing (M) Sdn. Bhd., and American Portwell Technology, Inc., and has a service repair arrangement with Flex Ltd. Although the Company uses standard parts and components for its products where possible, the Company’s CMs currently purchase, on the Company’s behalf, several key components used in the manufacture of products from single- or limited-source suppliers. The Company also entered into license agreements with some of its suppliers, including Qualcomm Inc., for technologies and components that are used in its products.