Callaway 2014 Annual Report Download - page 39

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes
and the section “Important Notice to Investors Regarding Forward-Looking Statements” that appear elsewhere in this report.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its results of operations, financial condition and liquidity are based upon the
Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, shareholders’ equity, sales and expenses, as well as related
disclosures of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other
assumptions that management believes to be reasonable under the circumstances. Actual results may materially differ from
these estimates under different assumptions or conditions. On an ongoing basis, the Company reviews its estimates to ensure
that the estimates appropriately reflect changes in its business and new information as it becomes available.
Management believes the critical accounting policies discussed below affect its more significant estimates and
assumptions used in the preparation of its consolidated financial statements. For a complete discussion of all of the Company’s
significant accounting policies, see Note 2 “Significant Accounting Policies” in the Notes to Consolidated Financial Statements
in this Form 10-K.
Revenue Recognition
Sales are recognized, in general, as products are shipped to customers, net of an allowance for sales returns and accruals
for sales programs in accordance with Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition”. In
certain cases, the Company recognizes sales when products are received by customers. The Company records a reserve for
anticipated returns through a reduction of sales and cost of sales in the period that the related sales are recorded. Sales returns
are estimated based upon historical returns, current economic trends, changes in customer demands and sell-through of
products. In addition, from time to time, the Company offers sales programs that allow for specific returns. The Company
records a reserve for anticipated returns related to these sales programs based on the terms of the sales program. Historically,
the Company’s actual sales returns have not been materially different from management’s original estimates. The Company
does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions
used to calculate the allowance for sales returns. However, if the actual costs of sales returns are significantly different than
the recorded estimated allowance, the Company may be exposed to losses or gains that could be material. Assuming there
had been a 10% increase over the recorded estimated allowance for 2014 sales returns, pre-tax income for the year ended
December 31, 2014 would have decreased by approximately $0.9 million.
The Company also records estimated reductions to revenue for sales programs such as incentive offerings. Sales program
accruals are estimated based upon the attributes of the sales program, management’s forecast of future product demand, and
historical customer participation in similar programs. The Company’s primary sales program, “the Preferred Retailer Program,”
offers longer payment terms during the initial sell-in period, as well as potential rebates and discounts, for participating retailers
in exchange for providing certain benefits to the Company, including the maintenance of agreed upon inventory levels, prime
product placement and retailer staff training. Under this program, qualifying retailers can earn either discounts or rebates
based upon the amount of product purchased. Discounts are applied and recorded at the time of sale. For rebates, the Company
accrues an estimate of the rebate at the time of sale based on the customer’s estimated qualifying current year product purchases.
The estimate is based on the historical level of purchases, adjusted for any factors expected to affect the current year purchase
levels. The estimated year-end rebate is adjusted quarterly based on actual purchase levels, as necessary. The Preferred Retailer
Program is generally short term in nature and the actual costs of the program are known as of the end of the year and paid to
customers shortly after year-end. In addition to the Preferred Retailer Program, the Company from time to time offers additional
sales program incentive offerings which are also generally short term in nature. Historically the Company’s actual costs related
to its Preferred Retailer Program and other sales programs have not been materially different than its estimates.
Revenues from gift cards are deferred and recognized when the cards are redeemed. In addition, the Company recognizes
revenue from unredeemed gift cards when the likelihood of redemption becomes remote and under circumstances that comply
with any applicable state escheatment laws. The Company’s gift cards have no expiration. To determine when redemption is
remote, the Company analyzes an aging of unredeemed cards (based on the date the card was last used or the activation date
if the card has never been used) and compares that information with historical redemption trends. The Company does not