Audiovox 2006 Annual Report Download - page 109

Audiovox Specialized Applications, LLC and Subsidiary
(A Limited Liability Company)
Notes to Financial Statements
manufacturer or its dealers to repair or replace defective products during such warranty periods at no
cost to the consumer. The Company estimates the costs that may be incurred under its basic limited
warranty and records a liability in the amount of such costs at the time product revenue is recognized.
The related expense is recorded as cost of goods sold in the accompanying statements of income.
Factors that affect the Company’s warranty liability include the number of units sold, historical and
anticipated rates of warranty claims, the historical lag time between product sales and product claims,
and cost per claim. The Company periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary. The Company utilizes historical trends and analytical
tools to assist in determining the appropriate loss reserve levels.
Changes in the Company’s warranty liability during the years ended November 30, 2006, 2005,
and 2004 are as follows:
2006 2005 2004
Balance, beginning ............................... $ 2,390,000 $ 2,182,000 $ 2,016,000
Accruals for products sold......................... 1,671,385 1,627,396 1,850,430
Payments made .................................. (1,754,385) (1,419,396) (1,684,430)
Balance, ending .................................. $ 2,307,000 $ 2,390,000 $ 2,182,000
Income taxes:
The members have elected to be taxed for federal and state income tax purposes as a limited
liability company under the provisions of the respective income tax codes. Under these provisions, the
members report net income of the Company on their corporate income tax returns.
Advertising costs:
The Company expenses the cost of advertising (including trade shows), as incurred. Advertising
costs in the accompanying statements of income were approximately $576,000, $819,000, and $535,000,
for the years ended November 30, 2006, 2005, and 2004 respectively.
Long-lived assets, goodwill and other intangible assets:
In July 2001, the FASB issued Statement of Financial Accounting Standard (‘‘SFAS’’) No. 141,
Business Combinations, and SFAS No. 142. SFAS No. 141 requires that the purchase method of
accounting be used for all future business combinations and specifies criteria intangible assets acquired
in a businesscombination must meet to be recognized and reported apart from goodwill.
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for impairment at least
annually or more frequently if an event occurs or circumstances change that could more likely than
not reduce the fair value of a reporting unit below its carrying amount.
As a result of adopting the provisions of SFAS No. 142, the Company did not record amortization
expense relating to its goodwill or its trademark rights. For intangible assets with indefinite lives,
including goodwill, the Company performed its annual impairment test, which resulted in a $300,000
impairment adjustment to goodwill during the year ended November 30, 2004 (See Note 8). This
resulted in the Company having no goodwill at November 2006 and 2005. There was no impairment
on the trademark rights for the years ended November 30, 2006, 2005 and 2004.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company reviews its long-lived assets periodically to determine potential impairment by
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