Callaway 2002 Annual Report Download - page 52

CALLAWAY GOLF COMPANY 49
Statement No. 13, and Technical Corrections.” SFAS No. 145
rescinds SFAS No. 4, “Reporting Gains and Losses from
Extinguishment of Debt,” and an amendment of that
Statement, SFAS No. 64, “Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements.” SFAS No. 145 also
rescinds SFAS No. 44, “Accounting for Intangible Assets of
Motor Carriers.” SFAS No. 145 amends SFAS No. 13,
“Accounting for Leases,” to eliminate an inconsistency
between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 shall be adopted on
January 1, 2003. The provisions related to SFAS No. 13 are
effective for transactions occurring after May 15, 2002. All
other provisions of SFAS No. 145 are effective for financial
statements issued after May 15, 2002. The adoption of
SFAS No. 145 has not had and is not expected to have a
material impact on the Company’s results of operations or
financial position.
Reclassifications
Certain prior period amounts have been reclassified to
conform with the current period presentation (Note 5).
Note 3. Ch a n g e in Ac coun t in g Es t im a t e
In preparing its financial statements, the Company is required
to make certain estimates, including those related to provisions
for warranty, uncollectible accounts receivable, inventory
obsolescence, valuation allowance for deferred tax assets and
the market value of derivative instruments. The Company
periodically reviews its estimates to ensure that the estimates
appropriately reflect changes in its business or as new
information becomes available.
The Company has a stated two-year warranty policy for its
golf clubs, although the Company’s historical practice has
been to honor warranty claims well after the two-year stated
warranty period. Prior to the third quarter of 2002, the
Company’s method of estimating both its implicit and explicit
warranty obligation was to utilize data and information based
on the cumulative failure rate by product after taking into
consideration specific risks the Company believes existed at
the time the financial statements were prepared. These
additional risks included product specific risks, such as the
introduction of products with new technology or materials
that would be more susceptible to failure or breakage, and
other business risks, such as increased warranty liability as
a result of acquisitions. In many cases, additions to the
warranty reserve for new product introductions have been
based on management’s judgment of possible future claims
derived from the limited product failure data that was
available at the time.
Beginning in the second quarter of 2001, the Company
began to compile data that illustrated the timing of warranty
claims in relation to product life cycles. In the third quarter of
2002, the Company determined it had gathered sufficient
data and concluded it should enhance its warranty accrual
estimation methodology to utilize the additional data. The
analysis of the data, in management’s judgment, provided
management with more insight into timing of claims and
demonstrated that some product failures are more likely to
occur early in a product’s life cycle while other product
failures occur in a more linear fashion over the product’s life
cycle. As a result of its analysis of the recently collected
additional information, the Company believes it has gained
better insight and improved judgment to more accurately
project the ultimate failure rates of its products. As a result of
this refinement in its methodology, the Company concluded
that it should change its methodology of estimating warranty
accruals and reduce its warranty reserve by approximately
$17,000,000. The $17,000,000 reduction is recorded in cost of
sales and favorably impacted gross profit as a percentage of
net sales by 2 percentage points for the year ended
December 31, 2002. The change in methodology has been
accounted for as a change in accounting principle inseparable
from a change in estimate.