Garmin 2002 Annual Report Download - page 26

Critical Accounting Policies and Estimates
General
The Company’s discussion and analysis of its financial condition and results of operations 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 presentation of these financial statements requires the Company to make estimates and judgements that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates, including those related to customer sales programs and
incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, and
contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the
carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition
The Company records estimated reductions to revenue for customer sales programs and incentive offerings including rebates,
price protection, promotions and other volume-based incentives. The reductions to revenue are based on estimates and
judgements using historical experience and expectation of future conditions. Changes in these estimates could negatively affect
the Company’s operating results. These incentives are accrued for on a percentage of sales basis and reviewed periodically. If
market conditions were to decline, the Company may take actions to increase customer incentive offerings possibly resulting in
an incremental reduction of revenue at the time the incentive is offered.
Bad Debt
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to
make required payments. The Company’s estimated losses are based on historical experience and expectation of future
conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
Warranties
The Company’s products sold are generally covered by a warranty for periods ranging from one to two years. The Company
accrues a warranty reserve for estimated costs to provide warranty services. The Company’s estimate of costs to service its
warranty obligations is based on historical experience and expectation of future conditions. To the extent the Company
experiences increased warranty claim activity or increased costs associated with servicing those claims, its warranty accrual will
increase resulting in decreased gross profit.
Product Liability
The Company has no product liability claims outstanding as of December 28, 2002 that are not covered by product liability
insurance.
Inventory
The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between
the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management, additional inventory write-downs may be
required.
Investments
Investments are classified as available for sale and recorded at fair value, and unrealized investment gains and losses are
reflected in stockholders’ equity. Investment income is recorded when earned, and capital gains and losses are recognized when
investments are sold. Investments are reviewed periodically to determine if they have suffered an impairment of value that is
considered other than temporary. If investments are determined to be impaired, a capital loss is recognized at the date of
determination.
Testing for impairment of investments also requires significant management judgement. The identification of potentially
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