Harman Kardon 2008 Annual Report Download - page 66

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regarding obsolete, damaged or excess inventory as well as current and future demand for our products.
Estimation of inventory valuation reserves requires us to analyze the aging and future demand for
inventories and to work closely with sales and marketing to forecast future product pricing trends. These
estimates have an effect on our results of operations. See Note 2, Inventories, for additional information.
Property, Plant and Equipment. Property, plant and equipment is stated at cost or, in the case of
capitalized leases, at the present value of the future minimum lease payments. Depreciation and
amortization of property, plant and equipment is computed primarily using the straight-line method over
useful lives estimated from 1 to 50 years or over the term of the lease, whichever is shorter. Buildings and
improvements are depreciated over 1 to 50 years, machinery and equipment are depreciated over 3 to 20
years and furniture and fixtures are depreciated over 3 to 10 years. See Note 3, Property, Plant and
Equipment, for additional information.
Goodwill. Goodwill was $436.4 million at June 30, 2008 compared with $403.7 million at June 30,
2007. The increase is primarily due to foreign currency translation and contingent purchase price
consideration associated with the acquisition of Innovative Systems GmbH. Our SFAS 142 annual
impairment test concluded that goodwill was not impaired as of the test date, April 30, 2008. In fiscal
2007, goodwill increased $22.5 million also due to contingent purchase price consideration and foreign
currency translation.
Pre-Production and Development Costs. We incur pre-production and development costs primarily
related to infotainment systems that we develop for automobile manufacturers pursuant to long-term
supply arrangements. We record certain costs incurred pursuant to these agreements as unbilled costs in
accordance with EITF Issue No. 99-5, Accounting for Pre-Production Costs Related to Long-Term Supply
Agreements, or the percentage-of-completion method of AICPA Statement of Position (“SOP”) 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Unbilled
costs at June 30, 2008 were $45.7 million, including $37.3 million of pre-production costs and $8.4
million of costs under development contracts. Unbilled costs reimbursable in the next twelve months total
$15.2 million and are recorded in Other current assets. Unbilled costs reimbursable in subsequent years
total $30.5 million and are recorded in Other assets. At June 30, 2008, we had fixed assets of $26.9
million for molds, dies and other tools which our customers will eventually purchase and own pursuant to
long-term supply arrangements.
At June 30, 2007, total unbilled costs were $30.8 million, including $14.5 million of pre-production costs
and $16.3 million of costs under development contracts. At June 30, 2007, unbilled costs reimbursable in
the next twelve months totaled $10.3 million and were recorded in Other current assets. Unbilled costs
reimbursable in subsequent years totaled $20.5 million and were recorded in Other assets. At June 30,
2007, we had fixed assets of $21.2 million for molds, dies and other tools which our customers will
eventually purchase and own pursuant to long-term supply contracts.
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