Callaway 2006 Annual Report Download - page 78

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method. The inventory balance, which includes material, labor and manufacturing overhead costs, is recorded net
of an estimated allowance for obsolete or unmarketable inventory. The estimated allowance for obsolete or
unmarketable inventory is based upon management’s understanding of market conditions and forecasts of future
product demand, all of which are subject to change. If actual charges for obsolescence or unmarketable inventory
significantly exceed the estimated allowance, the Company’s operating results would be significantly adversely
affected.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed
using the straight-line method over estimated useful lives as follows:
Buildings and improvements ........................................................ 10-30 years
Machinery and equipment .......................................................... 5-15 years
Furniture, computers and equipment .................................................. 3-5years
Production molds ................................................................. 2years
Normal repairs and maintenance costs are expensed as incurred. Expenditures that materially increase
values, change capacities or extend useful lives are capitalized. Replacements are capitalized and the property,
plant, and equipment accounts are relieved of the items being replaced. The related costs and accumulated
depreciation of disposed assets are eliminated and any resulting gain or loss on disposition is included in net
income. Construction in-process consists primarily of machinery and equipment that have not yet been placed
into service, unfinished molds as well as in-process internally developed software.
In accordance with American Institute of Certified Public Accountants Statement of Position 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” the Company
capitalizes certain costs incurred in connection with developing or obtaining internal use software. Costs incurred
in the preliminary project stage are expensed. All direct external costs incurred to develop internal-use software
during the development stage are capitalized and amortized using the straight-line method over the remaining
estimated useful lives. Costs such as maintenance and training are expensed as incurred.
In connection with the consolidation of Callaway Golf and Top-Flite golf club and golf ball manufacturing
and research and development operations, the Company disposed of certain long-lived assets. As a result, the
Company reduced the carrying value of its golf ball assets and therefore incurred pre-tax charges to earnings of
$44,711,000 in the aggregate, and of $1,122,000, $5,290,000 and $14,219,000 during 2006, 2005 and 2004,
respectively.
Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the
Company assesses potential impairments of its long-lived assets whenever events or changes in circumstances
indicate that the asset’s carrying value may not be recoverable. An impairment loss would be recognized when
the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The
carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset or asset group.
F-10