notes to consolidated financial statements Note 1 – Summary of Operations and Significant  Accounting Policies Nature of operations – Diodes Incorporated and its  subsidiaries manufacture and distribute discrete semi- conductor devices to manufacturers in the communica- tions, computing, industrial, consumer electronics and  automotive markets. The Company’s products include  small-signal transistors and MOSFETs, transient voltage  suppressors (TVSs), zeners, Schottkys, diodes, rectifiers,  bridges and silicon wafers. The products are sold pri- marily throughout North America, Asia and Europe. Principles of consolidation – The consolidated financial  statements include the accounts of the parent company, Diodes Incorporated (Diodes-North America), its wholly-  owned subsidiaries; Diodes Taiwan Corporation, Ltd.  (Diodes-Taiwan), Diodes Hong Kong, Ltd. (Diodes-Hong  Kong) and FabTech, Inc. (FabTech or Diodes-FabTech);  and its majority (95%) owned subsidiaries, Shanghai  KaiHong Electronics Co., Ltd. (Diodes-China) and  Diodes Shanghai Company, Ltd. (Diodes-Shanghai). All significant intercompany balances and transactions  have been eliminated in consolidation. Revenue recognition – Revenue is recognized when  there is persuasive evidence that an arrangement exists,  when delivery has occurred, when our price to the buyer  is fixed or determinable and when collectibility of the  receivable is reasonably assured. These elements are met  when title to the products is passed to the buyers, which  is generally when our product is shipped to both origi- nal equipment manufacturers (OEMs) and electronics  component distributors. The Company reduces revenue  in the period of sale for estimates of product returns and  other allowances.  In 2003, Diodes-China received approximately $254,000  in high-technology grants as an incentive for further invest- ment from the local Chinese government. The grants  were unrestricted and available upon receipt to fund the  operations of Diodes-China. The Company recognized  this grant income when received and recorded them  within “other income” on the accompanying statements  of income. No grant income was received in 2004 and the  Company does not expect this type of income in the future. Impairment on long-lived assets – Certain long-lived  assets of the Company are reviewed at least annually as  to whether their carrying values have become impaired  in accordance with SFAS No. 144,  “Accounting for the  Impairment or Disposal of Long-Lived Assets.” Goodwill – Beginning in fiscal 2002 with the adoption of Statement of Financial Accounting Standards (SFAS)  No. 142 ( “Goodwill and Other Intangible Assets” ), goodwill  is no longer amortized, but instead tested for impairment  at least annually. As a result of the Company’s adoption  of SFAS No. 142, an independent appraiser hired by the  Company, performed the required impairment tests of  goodwill as of January 1, 2004 and 2005, and has deter- mined that the goodwill is fully recoverable. No good- will was acquired or impaired during the years ended  December 31, 2002, 2003 and 2004. As of December 31,  2004, goodwill for Diodes-FabTech and Diodes-China  was $4.2 million and $0.9 million, respectively. Prior to  fiscal 2002, goodwill was amortized using the straight- line method over its estimated period of benefit. Property, plant and equipment – Property, plant and  equipment are depreciated using straight-line and accel- erated methods over the estimated useful lives, which  range from 20 to 55 years for buildings and 3 to 10 years  for machinery and equipment. Leasehold improvements  are amortized using the straight-line method over 3 to 5  years (see Note 3). Inventories – Inventories are stated at the lower of cost  or market value. Cost is determined principally by the  first-in, first-out method. On an on-going basis both  finished goods inventory and raw material inventory  is evaluated for obsolescence and slow-moving items.  This evaluation includes analysis of sales levels, sales  projections, and purchases by item, as well as raw mate- rial usage related to our manufacturing facilities. Based  upon this analysis, as well as an inventory aging analysis,  a reserve for obsolete and slow-moving inventory is  accrued (see Note 2). Product warranty – The Company generally warrants  its products for a period of one year from the date of sale.  Historically, warranty expense has not been significant. 32 Diodes Incorporated and Subsidiaries