Callaway 2006 Annual Report Download - page 41

the carrying amount of an asset may not be fully recoverable. Impairment is assessed when the undiscounted
future cash flows estimated to be derived from an asset are less than its carrying amount. Impairments are
recognized in income from operations. The Company uses its best judgment based on the most current facts and
circumstances surrounding its business when applying these impairment rules to determine the timing of the
impairment test, the undiscounted cash flows used to assess impairments, and the fair value of a potentially
impaired asset. Changes in assumptions used could have a significant impact on the Company’s assessment of
recoverability.
Warranty
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. The Company’s policy
is to accrue the estimated cost of satisfying future warranty claims at the time the sale is recorded. In estimating
its 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. If the number of actual warranty claims or the cost of satisfying warranty claims significantly
exceeds the estimated warranty reserve, the Company’s cost of sales, gross profit and net income would be
significantly adversely affected.
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable or receivable for the
current year. A deferred income tax asset or liability is established for the expected future consequences resulting
from temporary differences in the financial reporting and tax bases of assets and liabilities. The Company
provides a valuation allowance for its deferred tax assets when, in the opinion of management, it is more likely
than not that such assets will not be realized. While the Company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the
event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess
of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company determine that it would not be able to realize all or part
of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.
The Company is required to file federal and state tax returns in the United States and various other tax
returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the
applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by
the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are
believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by
the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews,
a taxing authority may disagree with respect to the interpretations the Company used to calculate its tax liability
and therefore require the Company to pay additional taxes. As required under applicable accounting rules, the
Company therefore accrues an amount for its estimate of additional tax liability, including interest and penalties,
which the Company could incur as a result of the ultimate resolution of disagreements with the various taxing
authorities related to federal, state and international tax matters. The tax contingency accrual is recorded as a
component of the Company’s net income taxes payable/receivable balance, which the Company reviews and
updates over time as more definitive information becomes available from taxing authorities, completion of tax
audits, expiration of statute of limitations, or upon occurrence of other events.
Share-based Compensation
Beginning in fiscal year 2006, the Company accounts for share-based compensation arrangements in
accordance with the provisions of Statement of Financial Accounting Standards No. 123R (“SFAS 123R”)
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