Creative 2009 Annual Report Download - page 30

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CREATIVE฀TECHNOLOGY฀LTD฀AND฀ITS฀SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
– For the financial year ended 30 June 2009
3. CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGEMENTS (cont’d)
(b) Impairment of loans and receivables
The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset is impaired.
To determine whether there is objective evidence of impairment, the Group considers factors such as the probability of
insolvency or significant financial difficulties of the debtor and default or significant delay in payments.
Where there is objective evidence of impairment, the amount and timing of future cash flows are estimated based on historical
loss experience for assets with similar credit risk characteristics.
(c) Product warranties
The warranty period for the bulk of the Group’s products typically ranges between 1 to 3 years. The product warranty
provision reflects management’s best estimate of probable liability under its product warranties. Management determines the
warranty provision based on known product failures (if any), historical experience, and other currently available evidence.
If actual experience of product returns or cost of repair differ from management’s estimates, revisions to the estimated
warranty provision would be required and could have a material effect on the Group’s future results of operations. The
Group’s warranty provision as at 30 June 2009 was US$2,899,000 (2008: US$5,815,000).
(d) Valuation of inventories
The Group states inventories at the lower of cost or net realisable value. The Group records a write-down for inventories
of components and products which have become obsolete or are in excess of anticipated demand or net realisable value.
Management performs a detailed assessment of inventory at each balance sheet date to establish provisions for excess and
obsolete inventories. Management’s evaluation includes a review of, among other factors, historical sales, current economic
trends, forecasted sales, demand requirements, product lifecycle and product development plans, quality issues, and current
inventory levels. The markets for PC peripherals and personal digital entertainment products are subject to a rapid and
unpredictable pace of product and component obsolescence and demand changes. If future demand or market conditions for
the Group’s products are less favourable than forecasted or if unforeseen technological changes negatively impact the utility
of component inventory, the Group may be required to record write-downs which would negatively affect gross margins in
the period when the write-downs are recorded and its operating results and financial position could be adversely affected.
The carrying amount of the Group’s inventories at 30 June 2009 was US$37,600,000 (2008: US$99,788,000).
(e) Impairment of financial assets, available-for-sale
The Group’s investments are inherently risky because the markets for the technologies or products that the companies have
under development are typically in the early stages and may never develop. In the event that the carrying value of an
investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge
is recorded and a new cost basis for the investment is established. Fair values for listed equity securities are determined
using quoted market prices. Fair values for unlisted equity securities are determined by using valuation techniques. The
Group uses a variety of methods, such as asset values, and makes assumptions that are based on market conditions existing
at each balance sheet date.
In order to determine whether a decline in value is other-than-temporary, the Group evaluates, among other factors: the
duration and extent to which the fair value has been less than the carrying value; the financial condition of and business
outlook for the company, including key operational and cash flow metrics, current market conditions and future trends in the
company’s industry, and the company’s relative competitive position within the industry; and the Group’s intent and ability
to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. The carrying
amount of the Group’s financial assets, available-for-sale at 30 June 2009 was US$27,753,000 (2008: US$37,247,000).
(f) Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date.
Goodwill and other intangibles are tested for impairment annually and at other times when such indicators exist. Other
non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable.
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