Toro 2014 Annual Report Download - page 59

measured using enacted tax rates expected to apply to taxable sold and amortized into net sales using the straight-line method
income in the years that those temporary differences are expected over the extended warranty period.
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income tax Sales Promotions and Incentives
expense in the period that includes the enactment date. A valua- At the time of sale, the company records an estimate for sales
tion allowance is provided when, in management’s judgment, it is promotion and incentive costs. Examples of sales promotion and
more likely than not that some portion or all of the deferred tax incentive programs include rebate programs on certain professional
asset will not be realized. The company has reflected the neces- products sold to distributors, volume discounts, retail financing sup-
sary deferred tax assets and liabilities in the accompanying consol- port, commissions, and other sales discounts and promotional pro-
idated balance sheets. Management believes the future tax deduc- grams. The estimates of sales promotion and incentive costs are
tions will be realized principally through carryback to taxable based on the terms of the arrangements with customers, historical
income in prior years, future reversals of existing taxable tempo- payment experience, field inventory levels, volume purchases, and
rary differences, and future taxable income. expectations for changes in relevant trends in the future. The
The company recognizes the effect of income tax positions only expense of each program is classified as a reduction from gross
if those positions are more likely than not of being sustained. Rec- sales.
ognized income tax positions are measured at the largest amount
that is greater than 50 percent likely of being realized. Changes in Cost of Sales
recognition or measurement are reflected in the period in which the Cost of sales primarily comprises direct materials and supplies
change in judgment occurs. The company also records interest consumed in the manufacture of product, as well as manufacturing
and penalties related to unrecognized tax benefits in income tax labor, depreciation expense, and direct overhead expense neces-
expense. sary to convert purchased materials and supplies into finished
product. Cost of sales also includes inbound freight costs, out-
Revenue Recognition bound freight costs for shipping products to customers, obsoles-
The company recognizes revenue for product sales when persua- cence expense, cost of services provided, and cash discounts on
sive evidence of an arrangement exists, title and risk of ownership payments to vendors.
passes to the customer, the sales price is fixed or determinable,
and collectability is probable. These criteria are typically met at the Selling, General, and Administrative Expense
time product is shipped, or in the case of certain agreements, Selling, general, and administrative expense primarily comprises
when product is delivered. A provision is made at the time the payroll and benefit costs, occupancy and operating costs of distri-
related revenue is recognized for estimated product returns, floor bution and corporate facilities, warranty expense, depreciation and
plan costs, rebates, and other sales promotion expenses. Sales, amortization expense on non-manufacturing assets, advertising
use, value-added, and other excise taxes are not recognized in and marketing expenses, selling expenses, engineering and
revenue. Freight revenue billed to customers is included in net research costs, information systems costs, incentive and profit
sales. sharing expense, and other miscellaneous administrative costs,
The company ships some of its products to a key retailer’s sea- such as legal costs for internal and outside services that are
sonal distribution centers on a consignment basis. The company expensed as incurred.
retains title to its products stored at the seasonal distribution cen-
ters. As the company’s products are removed from the seasonal Cost of Financing Distributor / Dealer Inventory
distribution centers by the key retailer and shipped to the key The company enters into limited inventory repurchase agreements
retailer’s stores, title passes from the company to the key retailer. with a third party financing company and Red Iron. The company
At that time, the company invoices the key retailer and recognizes has repurchased immaterial amounts of inventory under these
revenue for these consignment transactions. The company does repurchase agreements over the last three fiscal years. However,
not offer a right of return for products shipped to the key retailer’s an adverse change in retail sales could cause this situation to
stores from the seasonal distribution centers. From time to time, change, and thereby require the company to repurchase a portion
the company also stores inventory on a consignment basis at other of financed product. See Note 13 for additional information regard-
customers’ locations. The amount of consignment inventory as of ing the company’s repurchase arrangements.
October 31, 2014 and 2013 was $22,080 and $18,283, Included as a reduction to net sales are costs associated with
respectively. programs under which the company shares the expense of financ-
Revenue earned from service and maintenance contracts is rec- ing distributor and dealer inventories, referred to as floor plan
ognized ratably over the contractual period. Revenue from expenses. This charge represents interest for a pre-established
extended warranty programs is deferred at the time the contract is length of time based on a predefined rate from a contract with third
53