Audiovox 2001 Annual Report Download - page 33

31 Audiovox Corporation and Subsidiaries
(f) Inventory
Inventory consists principally of finished goods and is stated at the
lower of cost (primarily on a weighted moving average basis) or mar-
ket. The markets in which the Company competes are characterized
by declining prices, intense competition, rapid technological change
and frequent new product introductions.The Company maintains a sig-
nificant investment in inventory and, therefore, is subject to the risk of
losses on write-downs to market and inventory obsolescence. During
the fourth quarter of 2000, the Company decided to substantially exit
the analog phone line of business to reflect the rapid shift in the wire-
less industry from analog to digital technology and recorded a charge
of approximately $8,152 to reduce its carrying value of its analog
inventory to estimated market value. During the second quarter of
2001, the Company recorded an additional charge of approximately
$13,500 to further adjust the carrying value of its inventory to market.
During the fourth quarter ended November 30, 2001, the Company
recorded inventory write-downs to market of $7,150 as a result of the
reduction of selling prices primarily related to digital hand-held phones
during the first quarter of 2002 in anticipation of new digital tech-
nologies. It is reasonably possible that additional write-downs to mar-
ket may be required in the future, however, no estimate can be made
of such losses. In addition, given the anticipated emergence of new
technologies in the wireless industry, the Company will need to sell
existing inventory quantities of current technologies to avoid further
write-downs to market. In particular, at November 30, 2001, the
Company had on hand 575,000 units of a certain phone model, which
approximated $75,423. In the near future, the Company expects to
introduce a new model, as well as new technologies. No guarantee
can be made that further reductions in the carrying value of this or
other models will not be required in the future.
(g) Investment Securities
The Company classifies its equity securities in one of two categories:
trading or available-for-sale. Trading securities are bought and held
principally for the purpose of selling them in the near term. All other
securities not included in trading are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses on trading securities are included
in earnings. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and
are reported as a component of accumulated other comprehensive
income until realized.Realized gains and losses from the sale of available-
for-sale securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale security below
cost that is deemed other-than-temporary results in a reduction in car-
rying amount to fair value. The impairment is charged to earnings and
a new cost basis for the security is established. Dividend and interest
income are recognized when earned.
(h) Derivative Financial Instruments
Effective December 1, 2000, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (Statement 133), which
establishes new accounting and reporting guidelines for derivative
instruments and hedging activities. Statement 133 requires the recog-
nition of all derivative financial instruments as either assets or liabilities
in the statements of financial condition and measurement of those
instruments at fair value. Changes in the fair values of those deriva-
tives are reported in earnings or other comprehensive income (loss)
depending on the designation of the derivative and whether it qualifies
for hedge accounting. The accounting for gains and losses associated
with changes in the fair value of a derivative and the effect on the con-
solidated financial statements will depend on its hedge designation
and whether the hedge is highly effective in achieving offsetting
changes in the fair value or cash flows of the asset or liability hedged.
Under the provisions of Statement 133, the method that will be used
for assessing the effectiveness of a hedging derivative, as well as the
measurement approach for determining the ineffective aspects of the
hedge, must be established at the inception of the hedged instrument.
The adoption of Statement 133 had no impact o the Company’s results
of operations or financial position
The Company’s evaluations of hedge effectiveness are subject to
assumptions based on the terms and timing of the underlying expo-
sures. For a fair value hedge, both the effective and ineffective portions
of the change in fair value of the derivative instrument, along with an
adjustment to the carrying amount of the hedge item for fair value
changes attributable to the hedge risk, are recognized in earnings. For
a cash flow hedge, changes in the fair value of a derivative instrument
that is highly effective are deferred in accumulated other comprehen-
sive income or loss until the underlying hedged item is recognized in
earnings. The ineffective portion is recognized in earnings immedi-
ately. If a fair value or cash flow hedge was to cease to qualify for
hedge accounting or be terminated, it would continue to be carried on
the balance sheet at fair value until settled, but hedge accounting
would be discontinued prospectively. If a forecasted transaction were
no longer probable of occurring, amounts previously deferred in
accumulated other comprehensive income would be recognized
immediately in earnings.
The Company, as a policy, does not use derivative financial instru-
ments for trading purposes. A description of the derivative financial
instruments used by the Company follows:
(1) Forward Exchange Contracts
The Company conducts business in several foreign currencies
and, as a result, is subject to foreign currency exchange rate risk
due to the effects that exchange rate movements of these curren-
cies have on the Company’s costs. To minimize the effect of
exchange rate fluctuations on costs, the Company enters into
forward exchange rate contracts. The Company, as a policy, does
not enter into forward exchange contracts for trading purposes.The
forward exchange rate contracts are entered into as hedges of
inventory purchase commitments and of trade receivables due in
foreign currencies.
Gains and losses on the forward exchange contracts that qualify as
hedges are reported as a component of the underlying transaction.
Foreign currency transactions which have not been hedged are