Tecumseh Products 2012 Annual Report Download - page 43

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trends, the effects of new technologies and foreign currency movements, and are subject to a high degree of judgment and
complexity. All of these variables ultimately affect management’s estimate of the expected future cash flows to be derived from
the asset or group of assets under evaluation, as well as the estimate of their fair value. Changes in the assumptions and
estimates, or the inability to achieve our business plan, may affect the carrying value of long-lived assets and could result in
additional impairment charges in future periods.
Deposits – Our deposits primarily relate to social taxes and judicial matters and release of the monies to us depends on the
outcome of these matters.
Revenue Recognition – Revenues from the sale of our products are recognized once the risk and rewards of ownership have
transferred to the customers, which, in most cases, coincide with shipment of the products. For other cases involving export
sales, title transfers either when the products are delivered to the port of embarkation or received at the port of the country of
destination.
Income Taxes – Income taxes are accounted for using the asset and liability method. Under this method, income tax expense is
recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of
assets and liabilities, and for operating loss and tax credit carry forwards. 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 addition, we establish reserves for
income taxes to address potential exposures involving tax positions that could be challenged by tax authorities.
Derivative Financial Instruments – In the normal course of business, we employ established policies and procedures to manage
our exposure to changes in foreign exchange rates and commodity prices using financial instruments deemed appropriate by
management. As part of our risk management strategy, we may use derivative instruments, including currency forward
exchange contracts and commodity futures contracts to hedge certain foreign exchange exposures and commodity prices. Our
objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to
hedge them, thereby reducing volatility of earnings. Derivative positions are used only to manage our underlying exposures.
We do not use derivative financial instruments for speculative purposes. We formally designate and document all of our
hedging relationships at the inception of the hedge as either fair value hedges or cash flow hedges, as applicable. Currently, we
are primarily utilizing cash flow hedges. We document our strategy for undertaking the hedge transactions and our method of
assessing ongoing effectiveness. We apply hedge accounting based upon the criteria established by United States generally
accepted accounting principles ("U.S. GAAP") and record all derivative instruments at fair value. Changes in the fair value
(i.e., gains or losses) of the derivatives are recorded each period in the consolidated statements of operations or other
comprehensive income (loss).
For a derivative designated as a cash flow hedge, the gain or loss on the derivative is initially reported as a component of other
comprehensive income (loss) and subsequently reclassified into the statement of operations when the hedged transaction affects
earnings. For a derivative designated as a fair value hedge, the gain or loss on the derivative in the period of change and the
offsetting loss or gain of the hedged item attributed to the hedged risk are recognized in the statement of operations. We assess
the effectiveness of our futures and forwards contracts using the dollar offset method and de-designate the derivative if it is
determined that the derivative will no longer be highly effective at offsetting the cash flows of the hedged item. At the time a
derivative is de-designated, any losses recorded in other comprehensive income are recognized in our consolidated statement of
operations while gains remain in the accumulated other comprehensive income on our consolidated balance sheet until the
forecasted cash flows occur. All subsequent gains and losses related to the de-designated derivatives are recognized in our
consolidated statement of operations. See Note 14, “Derivative Instruments and Hedging Activities”, for a description of
derivative instruments.
Product Warranty – Provision is made for the estimated cost of maintaining product warranties at the time the product is sold
based upon historical claims experienced by product line. For most of our customers, warranty coverage on our compressors is
provided for a period of twelve months to three years from the date of manufacture. In the U.S., for wholesale customers only,
the warranty is provided for a period of up to twelve months from the date of their resale.
Self-Insured Risks – Provision is made for the estimated costs of known and anticipated claims under the deductible portions of
our health, liability and workers’ compensation insurance programs.
Environmental Expenditures – Expenditures for environmental remediation are expensed or capitalized, as appropriate.
Liabilities relating to probable remedial activities are recorded when the costs of such activities can be reasonably estimated, in
accordance with U.S. GAAP. Liabilities are not discounted or reduced for possible recoveries from insurance carriers.
Earnings (Loss) Per Share – Basic income (loss) per share is computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings per share reflect the dilutive effect that would result