Hasbro 2010 Annual Report Download - page 45

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Including the debentures and notes described above, the Company has remaining principal amounts of
long-term debt at December 26, 2010 of approximately $1,384,895 due at varying times from 2014 through
2040. The Company also had letters of credit and other similar instruments of approximately $179,592 and
purchase commitments of $340,007 outstanding at December 26, 2010. Letters of credit and similar
instruments include $114,890 related to the defense of tax assessments in Mexico. These assessments relate to
transfer pricing that the Company is defending and expects to be successful in sustaining its position. In
addition, the Company is committed to guaranteed royalty and other contractual payments of approximately
$39,513 in 2011.
Critical Accounting Policies and Significant Estimates
The Company prepares its consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America. As such, management is required to make certain
estimates, judgments and assumptions that it believes are reasonable based on information available. These
estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods presented. The significant
accounting policies which management believes are the most critical to aid in fully understanding and
evaluating the Company’s reported financial results include sales allowances, program production costs,
recoverability of goodwill and intangible assets, recoverability of royalty advances and commitments, pension
costs and obligations and income taxes.
Sales Allowances
Sales allowances for customer promotions, discounts and returns are recorded as a reduction of revenue
when the related revenue is recognized. Revenue from product sales is recognized upon passing of title to the
customer, generally at the time of shipment. Revenue from product sales, less related sales allowances, is
added to license fees and royalty revenue and reflected as net revenues in the consolidated statements of
operations. The Company routinely commits to promotional sales allowance programs with customers. These
allowances primarily relate to fixed programs, which the customer earns based on purchases of Company
products during the year. Discounts and allowances are recorded as a reduction of related revenue at the time
of sale. While many of the allowances are based on fixed amounts, certain of the allowances, such as the
returns allowance, are based on market data, historical trends and information from customers and are
therefore subject to estimation.
For its allowance programs that are not fixed, such as returns, the Company estimates these amounts
using a combination of historical experience and current market conditions. These estimates are reviewed
periodically against actual results and any adjustments are recorded at that time as an increase or decrease to
net revenues. During 2010, there have been no material adjustments to the Company’s estimates made in prior
years.
Program Production Costs
The Company incurs certain costs in connection with the production of television programs based
primarily on the Company’s toy and game brands, including animated and live-action programs and game
shows. These costs are capitalized as they are incurred and amortized using the individual-film-forecast
method, whereby these costs are amortized in the proportion that the current year’s revenues bear to
management’s estimate of total ultimate revenues as of the beginning of each fiscal year related to the
program. These capitalized costs are reported at the lower of cost, less accumulated amortization, or fair value,
and reviewed for impairment when an event or change in circumstances occurs that indicates that an
impairment may exist. The fair value is determined using a discounted cash flow model which is primarily
based on management’s future revenue and cost estimates.
The most significant estimates are those used in the determination of ultimate revenue in the individual-
film-forecast method. Ultimate revenue estimates impact the timing of program production cost amortization
in the consolidated statement of operations. Ultimate revenue includes revenue from all sources that are
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