FORM 10-K - Harman

tax assets to an amount we believe is more likely than not to be realized. We regularly review our deferred tax
assets for recoverability considering historical profitability, our ability to project future taxable income, the
expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to
operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income within the
defined lives of such assets, we could be required to increase our valuation allowance against all or a significant
portion of our deferred tax assets. This increase in valuation allowance could result in substantial increases in our
effective tax rate and could have a material adverse impact on our operating results. Conversely, if and when our
operations in some jurisdictions become sufficiently profitable before our current estimates, we would be
required to reduce all or a portion of our current valuation allowance and such reversal would result in an
increase in our earnings in such period. Adjustments to our valuation allowance, through charges to income tax
expense were $11.4 million, $0.5 million and zero for the years ending June 30, 2009, 2008 and 2007,
respectively.
The calculation of our deferred tax liabilities involves dealing with uncertainties in the application of
complex tax regulations. We recognize liabilities for tax audit issues in the U.S. and other tax jurisdictions based
on our estimate of whether and the extent to which additional taxes will be due. If payment of these amounts
ultimately proves to be unnecessary, the reversal of the liabilities would result in additional tax benefits
recognized in the period in which we determine the liabilities are no longer necessary. If our estimate of tax
liabilities proves to be less than the ultimate assessment, a further charge to expense would result. We recognize
interest and penalties related to income tax matters in income tax expense. Refer to Note 10 – Income Taxes in
the Notes to the Consolidated Financial Statements for more information.
Severance and Exit Costs
We recognize liabilities for severance and exit costs based upon the nature of the liability incurred. For
involuntary separation programs that are conducted according to the guidelines of our written involuntary
separation plan, we record the liability when it is probable and reasonably estimable in accordance with
Statement of Financial Accounting Standard (“SFAS”) No. 112, “Employers’ Accounting for Postemployment
Benefits” (“SFAS 112”). For involuntary separation programs that are conducted according to the provisions of
collective bargaining agreements or statutes, we record the liability when it is probable and reasonably estimable
in accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits” (“SFAS 88”) For one-time termination benefits, such as additional
severance pay, and other exit costs, such as lease and other contract termination costs, the liability is measured
and originally recognized at fair value in the period in which the liability is incurred, with subsequent changes
recognized in the period of change, in accordance with SFAS No.146, “Accounting for Costs Associated with
Exit or Disposal Activities” (“SFAS 146”). Refer to Note 12 – Restructuring in the Notes to the Consolidated
Financial Statements for more information.
Share-Based Compensation
Effective July 1, 2005, we adopted SFAS No. 123R, Share-Based Payment (“SFAS 123R”), using the
modified prospective method. Under SFAS 123R, share-based compensation expense is recognized based on the
estimated fair value of stock options and similar equity instruments awarded to employees. Refer to Note 11 –
Shareholders’ Equity and Share-Based Compensation in the Notes to the Consolidated Financial Statements for
additional information.
Results of Operations
Net Sales
Fiscal year 2009 net sales were $2.891 billion, a decrease of 30 percent compared to the prior year. Foreign
currency translation had a negative impact of approximately $194 million when compared to the prior year. Each
of our four business segments reported lower sales compared to the prior year. The decline in overall net sales
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