Harman Kardon 2007 Annual Report Download - page 60

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deferred costs were $0.4 million, net of accumulated amortization of $35.2 million. Deferred costs, net,
are included in Other assets on the balance sheet. Historically, deferred costs were comprised of costs to
acquire or develop automotive infotainment system software.
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. Additional information regarding income taxes appears in Note 10, Income Taxes.
Retirement benefits. We provide postretirement benefits to certain employees. Employees in the United
States are covered by a defined contribution plan. Our contributions to this plan are based on a percentage
of employee contributions and, with approval of the Board of Directors, profit sharing contributions may
be made as a percentage of employee compensation. These plans are funded on a current basis. We also
have a Supplemental Executive Retirement Plan (SERP) in the United States that provides retirement,
death and termination benefits, as defined, to certain key executives designated by the Board of Directors.
Certain employees outside the United States are covered by non-contributory defined benefit plans. The
defined benefit plans are funded in conformity with applicable government regulations. Generally,
benefits are based on age, years of service, and the level of compensation during the final years of service.
Effective June 30, 2007, we adopted SFAS No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS
No. 158”), which requires that the consolidated balance sheets reflect the funded status of pension plans.
In future reporting periods, the difference between actual amounts and estimates based on actuarial
assumptions will be recognized in other comprehensive income or loss in the period in which they occur.
These benefit plans are discussed further in Note 12, Retirement Benefits.
Foreign Currency Translation. The financial statements of subsidiaries located outside of the United
States generally are measured using the local currency as the functional currency. Assets, including
goodwill, and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet
date. The resulting translation adjustments are included in accumulated other comprehensive income
(loss). Income and expense items are translated at average monthly exchange rates. Gains and losses
from foreign currency transactions of these subsidiaries are included in net income.
Derivative Financial Instruments. We are exposed to market risks arising from changes in interest rates,
commodity prices and foreign currency exchange rates. We use derivatives in our management of interest
rate and foreign currency exposure. We do not utilize derivatives that contain leverage features. On the
date that we enter into a derivative that qualifies for hedge accounting, the derivative is designated as a
hedge of the identified exposure. We document all relationships between hedging instruments and hedged