Harman Kardon 2007 Annual Report Download - page 37

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Goodwill, of our consolidated financial statements for additional information regarding our goodwill
balance and annual impairment test.
Pre-Production and Development Costs
We incur pre-production and development costs related to infotainment systems that we develop for
automobile manufacturers pursuant to long-term supply agreements. Portions of these costs are
reimbursable under the separate agreements and are recorded as unbilled costs on our balance sheet in
other current assets and other assets. We believe that the terms of our supply contracts and established
relationship with these automobile manufacturers reasonably assure that we will collect the reimbursable
portions of these contracts. Accounting for development costs under the percentage of completion method
requires us to make estimates of costs to complete projects. We review these estimates on a quarterly
basis. Unforeseen cost overruns or difficulties experienced during development could cause losses on
these contracts. Such losses are recorded once a determination is made that a loss will occur.
Warranty Liabilities
We warrant our products to be free from defects in materials and workmanship for periods ranging from
six months to six years from the date of purchase, depending on the business segment and product. These
warranties require us to make estimates regarding the amount and costs of warranty repairs we expect to
make over a period of time. Several factors influence this estimate including historical analysis of
warranty repair by product category, the technological sophistication of certain products, replacement
costs and other factors. The estimates we use have an impact on our financial statements.
Income Taxes
Deferred income tax assets or liabilities are computed based on the temporary differences between the
financial statement and income tax basis of assets and liabilities using the statutory marginal income tax
rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses
or credits are based on the changes in the deferred income tax assets or liabilities from period to period.
We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more
likely than not to be realized. In determining the need for, and amount of, a valuation allowance, we
consider our ability to forecast earnings, future taxable income, carryback losses, if any, and we consider
feasible tax planning strategies. We believe the estimate of our income tax assets, liabilities and expense
are critical accounting estimates because if the actual income tax assets, liabilities and expenses differ
from our estimates the outcome could have a material impact on our results of operations.
Stock-Based Compensation
On July 1, 2005, we adopted SFAS No. 123R, Accounting for Stock-Based Compensation, using the
modified prospective method. Accordingly, prior period amounts presented herein have not been restated
to reflect the adoption of SFAS No. 123R. Prior to fiscal 2006, we used a fair value based method of
accounting for share-based compensation provided to our employees in accordance with SFAS No. 123R.
The adoption of this revised standard did not have a material impact on our results of operations as we
have recorded stock compensation expense on a fair value basis for all awards granted on or after July 1,
2002. As of June 30, 2007, there was $0.3 million of total unrecognized compensation cost related to