Callaway 2004 Annual Report Download - page 73

CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
future warranty obligations the Company considers various relevant factors, including the Company's stated
warranty policies and practices, the historical frequency of claims, and the cost to replace or repair its products
under warranty. The following table provides a reconciliation of the activity related to the Company's reserve
for warranty expense:
Year Ended December 31,
2004 2003 2002
(In thousands)
Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 12,627 $ 13,464 $ 34,864
Provision(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,930 11,752 (6,987)
Claims paid/costs incurred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (11,514) (12,589) (14,413)
Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 12,043 $ 12,627 $ 13,464
(1) In the third quarter of 2002, the Company changed its methodology of estimating warranty accruals and
reduced its warranty reserve by approximately $17,000,000. The change in methodology has been
accounted for as a change in accounting principle inseparable from a change in estimate (Note 4).
Fair Value of Financial Instruments
The Company's Ñnancial instruments consist of cash and cash equivalents, trade receivables and
payables, forward foreign currency exchange contracts (Note 8) and its Ñnancing arrangements (Note 7). The
carrying amounts of these instruments approximate fair value because of their short-term maturities and
variable interest rates.
Advertising Costs
The Company advertises primarily through television and print media. The Company's policy is to
expense advertising costs, including production costs, as incurred. Advertising expenses for 2004, 2003 and
2002 were $56,585,000, $44,770,000 and $44,001,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs for 2004,
2003 and 2002 were $30,557,000, $29,529,000 and $32,182,000, respectively.
Foreign Currency Translation and Transactions
The Company's foreign subsidiaries utilize their local currency as their functional currency. The accounts
of these foreign subsidiaries have been translated into United States dollars using the current exchange rate at
the balance sheet date for assets and liabilities and at the average exchange rate for the period for revenues
and expenses. Cumulative translation gains or losses are recorded as accumulated other comprehensive
income in shareholders' equity. Gains or losses resulting from transactions that are made in a currency
diÅerent from the functional currency are recognized in earnings as they occur or, for hedging contracts, when
the underlying hedged transaction aÅects earnings. The Company recorded transaction gains of $744,000,
$1,566,000 and $2,046,000 in 2004, 2003 and 2002, respectively, in interest and other income, net.
Derivatives and Hedging
The Company enters into derivative Ñnancial instrument contracts only for hedging purposes and
accounts for them in accordance with Statement of Financial Accounting Standard (SFAS) No. 133 and its
amendments SFAS No. 137, ""Accounting for Derivative Instruments and Hedging Activities-Deferral of the
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