Callaway 2006 Annual Report Download - page 79

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill and Intangible Assets
Goodwill and intangible assets consist of goodwill, trade names, trademarks, service marks, trade dress,
patents and other intangible assets acquired during the acquisition of Odyssey Sports, Inc., the Top-Flite assets,
FrogTrader, Inc., the Tour Golf Group assets and certain foreign distributors. See Note 4 for further discussion of
the intangible assets acquired in connection with the FrogTrader and Tour Golf Group Acquisitions.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets
with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events
indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of its
indefinite-lived intangible assets over their estimated fair value. If the carrying value exceeds the estimate of fair
value a write-down is recorded.
Intangible assets that are determined to have definite lives are amortized over their estimated useful lives
and are measured for impairment only when events or circumstances indicate the carrying value may be impaired
in accordance with SFAS No. 144 discussed above. See Note 7 for further discussion of the Company’s goodwill
and intangible assets.
Investments
The Company determines the appropriate classification of its investments at the time of acquisition and
reevaluates such determination at each balance sheet date. Trading securities are carried at quoted fair value, with
unrealized gains and losses included in earnings. Available-for-sale securities are carried at quoted fair value,
with unrealized gains and losses reported in shareholders’ equity as a component of accumulated other
comprehensive income. Other investments that do not have readily determinable fair values are stated at cost and
are reported in other assets. Realized gains and losses are determined using the specific identification method and
are included in interest and other income, net.
During 2006, the Company made an investment of approximately $10,008,000 in Golf Entertainment
International Limited (“GEI”). The Company accounted for this investment under the cost method in accordance
with the provisions of APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common
Stock” (“APB 18”). The Company will monitor the investment for impairment in accordance with APB 18 and
Emerging Issues Task Force No. 03-1 “The Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments.” See Note 3 for further discussion of the Company’s investments.
Share-Based Employee 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”)
“Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-
based payment awards to employees and directors based on estimated fair values. The Company uses the Black-
Scholes option valuation model to estimate the fair value of its stock options at the date of grant. The Black-
Scholes option valuation model requires the input of subjective assumptions to calculate the value of stock
options. The Company uses historical data among other information to estimate the expected price volatility, the
expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve
in effect at the time of grant for the estimated life of the option.
In accordance with SFAS 123R, the Company records compensation expense for Restricted Stock Awards
and Restricted Stock Units based on the estimated fair value of the award on the date of grant. The estimated fair
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