Avid 2005 Annual Report Download - page 42

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Allowance for Bad Debts and Reserves for Recourse under Financing Transactions
We maintain allowances for estimated bad debt losses resulting from the inability of our customers to make required payments for
products or services. When evaluating the adequacy of the allowances, we analyze accounts receivable balances, historical bad
debt experience, customer concentrations, customer credit-worthiness and current economic trends. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be
required.
We provide third-party lease financing options to many of our customers. We are not generally a party to the leases; however,
during the terms of these leases, which are generally three years, we remain liable for any unpaid principal balance upon default by
the end-user, but such liability is limited in the aggregate. See Footnote H to our Consolidated Financial Statements in Item 8. We
record revenue from these transactions upon the shipment of our products because we believe that our collection experience with
similar transactions supports our assessment that the fee is fixed or determinable. We have operated these programs for over ten
years and to date defaults under the program have consistently ranged between 2% and 4%. We maintain reserves for estimated
recourse losses under this financing program based on these historical default rates. While we have experienced insignificant losses
from defaults to date under this program, deterioration in the financial condition of our customers who participate in the program
could require additional reserves.
Inventories
Inventory in the digital media market, including our inventory, is subject to rapid technological change or obsolescence. We
regularly review inventory quantities on hand and write down inventory to its realizable value to reflect estimated obsolescence or
unmarketability based upon assumptions about future inventory demand (generally for the following twelve months) and market
conditions. If actual future demand or market conditions are less favorable than we estimate, additional inventory write-downs may
be required.
Business Combinations
When we acquire new businesses, we use the purchase method of accounting as required by SFAS No. 141, “Business
Combinations”. We allocate the purchase price of businesses acquired to the assets, including intangible assets, acquired and
the liabilities assumed based on their estimated fair values, with any amount in excess of such allocations designated as goodwill.
Significant management judgments and assumptions are required in determining the fair value of acquired assets and liabilities,
particularly acquired intangible assets. For example, it is necessary to estimate the portion of development efforts that are
associated with technology that is in process and has no alternative future use. The valuation of purchased intangible assets is based
upon estimates of the future performance and cash flows from the acquired business. If different assumptions are used, it could
materially impact the purchase price allocation and our financial position and results of operations.
Goodwill and Intangible Assets
We assess the impairment of goodwill and identifiable intangible assets on at least an annual basis and whenever events or changes
in circumstances indicate that the carrying value of the asset may not be recoverable. Factors we consider important that could
trigger an impairment review include significant negative industry or economic trends, unanticipated competition, loss of key
personnel, a more-likely-than-not expectation that a reporting unit or component thereof will be sold or otherwise disposed of,
significant underperformance relative to the historical or projected future operating results, significant changes in the manner of
use of the acquired assets or the strategy for our overall business, a significant decline in our stock price for a sustained period, a
reduction of our market capitalization relative to our net book value and other such circumstances.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, we do not amortize goodwill and certain intangible
assets. The goodwill impairment test prescribed by SFAS No. 142 requires us to identify reporting units and to determine estimates
of the fair values of our reporting units as of the date we test for impairment. Our organizational structure is based on strategic
business units that offer various products to the principal markets in which our products are sold. These strategic business units
equate to our reporting units which are currently the same as our operating segments: Professional Video, Audio and Consumer
Video. All three of the reporting units include goodwill.
In the goodwill impairment analysis, the fair value of each reporting unit is compared to its carrying value, including goodwill.
We use a discounted cash flow valuation model to determine the fair values of our reporting units. This model focuses primarily
on estimates of future revenues and profits for each reporting unit. We estimate these amounts by evaluating historical trends,
current budgets, operating plans and industry data. If the reporting unit’s carrying value exceeds its fair value, we would record
an impairment loss equal to the difference between the carrying value of the goodwill and its implied fair value. We complete our