Callaway 2014 Annual Report Download - page 78

F-10
Amounts billed to customers for shipping and handling are included in net sales and costs incurred related to shipping
and handling are included in cost of sales.
Royalty income is recorded in net sales as underlying product sales occur, subject to certain minimums, in accordance
with the related licensing arrangements. The Company recognized royalty income under its various licensing agreements of
$8,881,000, $9,130,000 and $7,073,000 during 2014, 2013 and 2012, respectively.
Warranty Policy
The Company has a stated two-year warranty policy for its golf clubs. The Company’s policy is to accrue the estimated
cost of satisfying future warranty claims at the time the sale is recorded. In estimating its future warranty obligations, the
Company considers various relevant factors, including the Company’s stated warranty policies and practices, the historical
frequency of claims, and the cost to replace or repair its products under warranty. The decrease in the provision for warranty
claims is primarily due to a decline in warranty return rates as a result of improved durability of newer products combined
with an increase in customer paid repairs.
The following table provides a reconciliation of the activity related to the Company’s reserve for warranty expense:
Years Ended December 31,
2014 2013 2012
(In thousands)
Beginning balance .......................................................................................................... $ 6,406 $ 7,539 $ 8,140
Provision....................................................................................................................... 4,724 5,177 7,507
Claims paid/costs incurred ........................................................................................... (5,523)(6,310)(8,108)
Ending balance................................................................................................................ $ 5,607 $ 6,406 $ 7,539
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability (the exit
price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market
participants. The Company measures and discloses the fair value of nonfinancial and financial assets and liabilities utilizing
a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable
or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available.
The measurement of assets and liabilities at fair value are classified using the following three-tier hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities;
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable
in active markets; and
Level 3: Fair value measurements derived from valuation techniques in which one or more significant inputs or significant
value drivers are unobservable.
The Company measures fair value using a set of standardized procedures that are outlined herein for all assets and
liabilities which are required to be measured at fair value. When available, the Company utilizes quoted market prices from
an independent third-party source to determine fair value and classifies such items in Level 1. In some instances where a
market price is available, but the instrument is in an inactive or over-the-counter market, the Company consistently applies
the dealer (market maker) pricing estimate and uses a midpoint approach on bid and ask prices from financial institutions to
determine the reasonableness of these estimates. Assets and liabilities subject to this fair value valuation approach are typically
classified as Level 2.
Items valued using internally-generated valuation techniques are classified according to the lowest level input that is
significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or Level 3 even
though there may be some significant inputs that are readily observable. The Company utilizes a discounted cash flow valuation
model whenever applicable to derive a fair value measurement on long-lived assets, goodwill and amortizing intangibles. The
Company uses its internal cash flow estimates discounted at an appropriate rate, quoted market prices, royalty rates when