Callaway 2004 Annual Report Download - page 82

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
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
speciÑc risks the Company believes existed at the time the Ñnancial statements were prepared. These
additional risks included product speciÑc 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 suÇcient 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 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
reÑnement 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 proÑt as a percentage of net sales by two 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.
F-17