Audiovox 2006 Annual Report Download - page 22

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Sales Incentives
We offer sales incentives to our customers in the form of (1) co-operative advertising allowances;
(2) market development funds; (3) volume incentive rebates and (4) other trade allowances. We
account for sales incentives in accordance with EITF 01-9, ‘‘Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of Vendor’s Products)’’ (EITF 01-9). Except for other
trade allowances, all sales incentives require the customer to purchase our products during a specified
period of time. All sales incentives require customers to claim the sales incentive within a certain time
period (referred to as the ‘‘claim period’’) and claims are settled either by the customer claiming a
deduction against an outstanding account receivable or by the customer requesting a check. All costs
associated with sales incentives are classified as a reduction of net sales, and the following is a
summary of the various sales incentive programs:
Co-operative advertising allowances are offered to customers as a reimbursement towards their
costs for print or media advertising in which our product is featured on its own or in conjunction with
other companies’ products. The amount offered is either a fixed amount or is based upon a fixed
percentage of sales revenue or fixed amount per unit sold to the customer during a specified time
period.
Market development funds are offered to customers in connection with new product launches or
entrance into new markets. The amount offered for new product launches is based upon a fixed
amount or fixed percentage of our sales revenue to the customer or a fixed amount per unit sold to
the customer during a specified time period. We accrue the cost of co-operative advertising allowances
and market development funds at the later of when the customer purchases our products or when the
sales incentive is offered to the customer.
Volume incentive rebates offered to customers require that minimum quantities of product be
purchased during a specified period of time. The amount offered is either based upon a fixed
percentage of our sales revenue to the customer or a fixed amount per unit sold to the customer. We
make an estimate of the ultimate amount of the rebate customers will earn based upon past history
with the customer and other facts and circumstances. We have the ability to estimate these volume
incentive rebates, as there does not exist a relatively long period of time for a particular rebate to be
claimed. Any changes in the estimated amount of volume incentive rebates are recognized
immediately using a cumulative catch-up adjustment.
Other trade allowances are additional sales incentives that we provide to customers subsequent to
the related revenue being recognized. In accordance with EITF 01-9, we record the provision for these
additional sales incentives at the later of when the sales incentive is offered or when the related
revenue is recognized. Such additional sales incentives are based upon a fixed percentage of the selling
price to the customer, a fixed amount per unit, or a lump-sum amount.
The accrual balance for sales incentives at February 28, 2007 and 2006 was $7,410 and $8,512,
respectively. Although we make our best estimate of sales incentive liabilities, many factors, including
significant unanticipated changes in the purchasing volume and the lack of claims from customers
could have a significant impact on the liability for sales incentives and reported operating results.
We reverse earned but unclaimed sales incentives based upon the expiration of the claim period
of each program. Unclaimed sales incentives that have no specified claim period are reversed in the
quarter following one year from the end of the program. We believe that the reversal of earned but
unclaimed sales incentives upon the expiration of the claim period is a disciplined, rational, consistent
and systematic method of reversing unclaimed sales incentives.
For the year ended February 28, 2007, the three months ended February 28, 2006 and the years
ended November 30, 2005 and 2004, reversals of previously established sales incentive liabilities
amounted to $2,460, $480, $2,836 and $3,889, respectively. These reversals include unearned and
unclaimed sales incentives. Unearned sales incentives are volume incentive rebates where the
customer did not purchase the required minimum quantities of product during the specified time.
Volume incentive rebates are reversed into income in the period when the customer did not reach the
required minimum purchases of product during the specified time. Reversals of unearned sales
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