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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
“Financial Statements – Considering the Effects of Prior Year Misstatements When Quantifying Misstatements
in Current Year Financial Statements” (“SAB 108”). This new guidance addresses how a registrant should
quantify the effect of errors on the financial statements based on their impact to both the balance sheet and the
income statement in order to determine materiality. The guidance provides for a one-time cumulative effect
adjustment to correct for misstatements and errors that were not deemed material under a prior approach but are
material under the SAB 108 approach. The application of SAB 108 did not have an effect on the Company’s
consolidated financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This new
standard provides guidance for using fair value to measure assets and liabilities and information about the extent
to which companies measure assets and liabilities at fair value, the information used to measure fair value, and
the effect of fair value measurements on earnings. This framework is intended to provide increased consistency
in how fair value determinations are made under various existing accounting standards which permit, or in some
cases require, estimates of fair market value. SFAS 157 also expands financial statement disclosure requirements
about a company’s use of fair value measurements, including the effect of such measures on earnings. The
provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after
November 15, 2007. While the Company is currently evaluating the provisions of SFAS 157, the adoption is not
expected to have a material impact on its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”) which clarifies the accounting for uncertainty in income taxes recognized in the financial statements
in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. This pronouncement prescribes a
recognition threshold and measurement process for recording in the financial statements uncertain tax positions
taken or expected to be taken in the Company’s tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and disclosure requirements for uncertain tax
positions. The accounting provisions of FIN 48 are effective for the Company beginning January 1, 2007. The
cumulative effect of initially adopting FIN 48 will be recorded as an adjustment to opening retained earnings in
the year of adoption and will be presented separately. The Company is in the process of evaluating the effect, if
any, the adoption of FIN 48 will have on its financial statements.
Reclassifications
In accordance with Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”),
income taxes recognized on intercompany profits in inventory should be classified as prepaid taxes and relieved
once inventory is sold to third parties. Historically, the Company classified income taxes on intercompany profits
in inventory as deferred taxes. As a result, the Company reclassified approximately $7,743,000 from deferred
taxes to prepaid taxes and as such has been reflected in other current assets in the Consolidated Condensed
Balance Sheet as of December 31, 2005, as required by ARB 51.
Note 3. Investments
Investment in Golf Entertainment International Limited Company
During the fourth quarter of 2006, the Company made an investment in Golf Entertainment International
Limited (“GEI”), the owner and operator of TopGolf entertainment centers. In connection with the investment,
the Company acquired Preferred Shares of GEI for approximately $9,630,000 and provided GEI with debt
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