Graco 2005 Annual Report Download - page 44

associated with the use of a long-lived asset or asset group. If impairment indicators are present, the
Company estimates the future cash Öows for the asset or group of assets. The sum of the undiscounted
future cash Öows attributable to the asset or group of assets is compared to their carrying amount. The
cash Öows are estimated utilizing various assumptions regarding future revenue and expenses, working
capital, and proceeds from asset disposals on a basis consistent with the strategic plan. If the carrying
amount exceeds the sum of the undiscounted future cash Öows, the Company determines the assets' fair
value by discounting the future cash Öows using a risk-free discount rate and records an impairment
charge as the diÅerence between the fair value and the carrying value of the asset group. Generally, the
Company performs its testing of the asset group at the product-line level, as this is the lowest level for
which identiÑable cash Öows are available. See Footnote 18 for additional information.
Shipping and Handling Costs: The Company records shipping and handling costs as a component of
costs of products sold.
Product Liability Reserves: The Company has a self-insurance program for product liability that
includes reserves for self-retained losses and certain excess and aggregate risk transfer insurance. The
Company uses historical loss experience combined with actuarial evaluation methods, review of signiÑcant
individual Ñles and the application of risk transfer programs in determining required product liability
reserves. The Company's actuarial evaluation methods take into account claims incurred but not reported
when determining the Company's product liability reserve. While the Company believes that it has
adequately reserved for these claims, the ultimate outcome of these matters may exceed the amounts
recorded by the Company and such additional losses may be material to the Company's Consolidated
Financial Statements.
Product Warranties: In the normal course of business, the Company oÅers warranties for a variety
of its products. The speciÑc terms and conditions of the warranties vary depending upon the speciÑc
product and markets in which the products were sold. The Company accrues for the estimated cost of
product warranty at the time of sale based on historical experience.
Advertising Costs: The Company expenses advertising costs as incurred. Cooperative advertising
with customers is recorded in the Consolidated Financial Statements as a reduction of sales and totaled
$170.5 million, $151.4 million, and $184.0 million for 2005, 2004 and 2003, respectively. All other
advertising costs are recorded in selling, general and administrative expenses and totaled $147.5 million,
$130.1 million and $137.4 million in 2005, 2004 and 2003, respectively.
Research and Development Costs: Research and development costs relating to both future and
current products are charged to selling, general and administrative expenses as incurred. These costs
aggregated $103.0 million, $105.8 million, and $91.6 million in 2005, 2004 and 2003, respectively.
Derivative Financial Instruments: The Company follows SFAS No. 133, ""Accounting for Derivative
Instruments and Hedging Activities,'' as amended. Derivative Ñnancial instruments are used only to
manage certain commodity, interest rate and foreign currency risks. These instruments include commodity
swaps, interest rate swaps, long-term cross currency interest rate swaps, forward exchange contracts and
options. The Company's forward exchange contracts and long-term cross currency interest rate swaps do
not subject the Company to risk due to foreign exchange rate movement because gains and losses on these
instruments generally oÅset gains and losses on the assets, liabilities, and other transactions being hedged.
On the date in which the Company enters into a derivative, the derivative is designated as a hedge of
the identiÑed exposure. The Company measures eÅectiveness of its hedging relationships both at hedge
inception and on an ongoing basis.
Interest Rate Risk Management: Gains and losses on interest rate swaps designated as cash Öow
hedges, to the extent that the hedge relationship has been eÅective, are deferred in other comprehensive
income and recognized in interest expense over the period in which the Company recognizes interest
expense on the related debt instrument. Any ineÅectiveness on these instruments is immediately
recognized in interest expense in the period that the ineÅectiveness occurs.
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