Callaway 2005 Annual Report Download - page 77

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivatives and Hedging
The Company enters into derivative financial instrument contracts only for hedging purposes and accounts
for them in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 133 “Accounting for
Derivative Instruments and Hedging Activities,” and its amendments SFAS No. 137, “Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of SFAS No. 133,” SFAS No. 138,
“Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149,
“Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” The purpose of these
derivative instruments is to minimize the variability of cash flows associated with the anticipated transactions
being hedged. As changes in foreign currency rates impact the United States dollar value of anticipated
transactions, the fair value of the forward contracts also changes, offsetting foreign currency rate fluctuations.
Changes in the fair value of derivatives are recorded each period in income or other comprehensive income,
depending on whether the derivatives are designated as hedges and, if so, the types and effectiveness of hedges.
Additional information about the Company’s use of derivative instruments is presented in Note 8.
Earnings Per Common Share
Basic earnings per common share is calculated by dividing net income for the period by the weighted-
average number of common shares outstanding during the period. Diluted earnings per common share is
calculated by dividing net income for the period by the sum of the weighted-average number of common shares
outstanding during the period, plus the number of potentially dilutive common shares (“dilutive securities”) that
were outstanding during the period. Dilutive securities include shares owned by the Callaway Golf Company
Grantor Stock Trust, options granted pursuant to the Company’s stock option plans, potential shares related to the
Employee Stock Purchase Plan and Restricted Stock grants to employees and non-employees (see Note 10).
Dilutive securities related to the Callaway Golf Company Grantor Stock Trust and the Company’s stock option
plans are included in the calculation of diluted earnings per common share using the treasury stock method.
Under the treasury stock method, the dilutive securities related to the Callaway Golf Company Grantor Stock
Trust do not have any impact upon the diluted earnings per common share. Dilutive securities related to the
Employee Stock Purchase Plan are calculated by dividing the average withholdings during the period by 85% of
the lower of the offering period price or the market value at the end of the period. Potentially dilutive securities
are excluded from the computation of earnings per share in periods in which a net loss is reported, as their effect
would be antidilutive. A reconciliation of the numerators and denominators of the basic and diluted earnings per
common share calculations for the years ended December 31, 2005, 2004 and 2003 is presented in Note 9.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments purchased with original maturities of three months or less.
Allowance for Doubtful Accounts
The Company maintains an allowance for estimated losses resulting from the failure of its customers to
make required payments. An estimate of uncollectible amounts is made by management based upon historical
bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial
condition and current economic trends, all of which are subject to change. If the actual uncollected amounts
significantly exceed the estimated allowance, the Company’s operating results would be significantly adversely
affected.
F-9