Audiovox 2004 Annual Report Download - page 36

the accuracy of its forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of the Company's inventory and its reported
operating results.
Goodwill and Other Intangible Assets
Goodwill and Other Intangible assets consist of the excess cost over fair
value of assets acquired (goodwill) and other intangible assets (patents and
trademarks). Goodwill, which includes equity investment goodwill, is calculated
as the excess of the cost of purchased businesses over the value of their
underlying net assets. Goodwill and other intangible assets that have an
indefinite useful life are not amortized.
On an annual basis, we test goodwill and other intangible assets for
impairment. To determine the fair value of these intangible assets, there are
many assumptions and estimates used that directly impact the results of the
testing. We have the ability to influence the outcome and ultimate results based
on the assumptions and estimates we choose. To mitigate undue influence, we set
criteria that are reviewed and approved by various levels of management.
Additionally, we evaluate our recorded intangible assets with the assistance of
a third−party valuation firm, as necessary. These impairment tests may result in
impairment losses that could have a material adverse impact on our results of
operations.
Warranties
The Company offers warranties of various lengths depending upon the
specific product. The Company's standard warranties require the Company to
repair or replace defective product returned to the Company by both end users
and its customers during such warranty period at no cost to the end users or
customers. The Company records an estimate for warranty related costs in cost of
sales based upon its actual historical return rates and repair costs at the time
of sale. The estimated liability for future warranty expense, which has been
included in accrued expenses and other current liabilities, amounted to $8,408
and $7,947 at November 30, 2003 and 2004, respectively. While the Company's
warranty costs have historically been within its expectations and the provisions
established, the Company cannot guarantee that it will continue to experience
the same warranty return rates or repair costs that have been experienced in the
past. A significant increase in product return rates, or a significant increase
in the costs to repair the Company's products, could have a material adverse
impact on its operating results for the period or periods in which such returns
or additional costs materialize.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". We record a
valuation allowance to reduce our deferred tax assets to the amount of future
tax benefit that is more likely than not to be realized. We decrease the
valuation allowance when, based on the weight of available evidence, it is more
likely than not that the amount of future tax benefit will be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, there is
no assurance that the valuation allowance will not need to be increased to cover
additional deferred tax assets that may not be realized. Any increase or decline
in the valuation allowance could have a material adverse impact on our income
tax provision and net income in the period in which such determination is made.
Furthermore, the Company provides tax reserves for Federal, state and
international exposures relating to potential tax examination issues, planning
initiatives and compliance responsibilities. The development of these reserves
requires judgments about tax issues, potential outcomes and timing and is a
subjective critical estimate.
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