Harman Kardon 2008 Annual Report Download - page 67

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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 11, Income Taxes,
including discussion of the implementation of FIN 48, Accounting for Uncertainty in 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.
These benefit plans are discussed further in Note 16, 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
items and assess the effectiveness of our hedges at inception and on an ongoing basis.
For each derivative instrument that is designated and qualifies as a fair value hedge, the gain or loss on
the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the
hedged risk are recognized in current earnings during the period of the change in fair values. For each
derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the
gain or loss on the derivative instrument is reported as a component of other comprehensive income and
reclassified into earnings in the period during which the hedged transaction affects earnings. For
derivative instruments not designated as hedging instruments, the gain or loss is recognized in current
earnings during the period of change. For additional information regarding derivatives, see Note 19,
Derivatives.
Interest Rate Management. We have an interest rate swap agreement to effectively convert the interest
on an operating lease from a variable to a fixed rate. At the end of each reporting period, the discounted