Callaway 2007 Annual Report Download - page 40

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Revenues from gift cards are deferred and recognized when the cards are redeemed. In addition, the
Company recognizes revenue from unredeemed gift cards when the likelihood of redemption becomes remote
and under circumstances that comply with applicable state escheatment laws, if any. The Company’s gift cards
have no expiration, therefore, to determine when redemption is remote, the Company analyzes an aging of
unredeemed cards (based on the date the card was last used or the activation date if the card has never been used)
and compares that information with historical redemption trends. The Company does not believe there is a
reasonable likelihood that there will be a material change in the future estimates or assumptions used to
determine the timing of recognition of gift card revenues. However, if the Company is not able to accurately
determine when gift card redemption is remote, the Company may be exposed to losses or gains that could be
material. The deferred revenue associated with outstanding gift cards increased $1.8 million to $4.8 million
during the year ended December 31, 2007.
Inventories
Inventories are valued at the lower of cost or fair market value. 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 current inventory levels, sales trends and historical
experience as well as management’s understanding of market conditions and forecasts of future product demand,
all of which are subject to change.
The calculation of the Company’s allowance for obsolete or unmarketable inventory requires management
to make assumptions and to apply judgment regarding inventory aging, forecasted consumer demand and pricing,
regulatory (USGA and R&A) rule changes, the promotional environment and technological obsolescence. The
Company does not believe there is a reasonable likelihood that there will be a material change in the future
estimates or assumptions used to calculate the allowance. However, if estimates regarding consumer demand are
inaccurate or changes in technology affect demand for certain products in an unforeseen manner, the Company
may be exposed to losses that could be material. Historically, there have been no material inventory write-offs
for which an allowance had not previously been established. Assuming there had been a 10% increase in the
Company’s 2007 allowance for obsolete or unmarketable inventory, net earnings for the year ended
December 31, 2007 would have been reduced by approximately $2.0 million.
Long-Lived Assets
In the normal course of business, the Company acquires tangible and intangible assets. The Company
periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property, plant
and equipment, investments, goodwill and other intangible assets) whenever events or changes in circumstances
indicate that 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.
Determining whether an impairment has occurred typically requires various estimates and assumptions, including
determining the amount of undiscounted cash flows directly related to the potentially impaired asset, the useful
life over which cash flows will occur, the timing of the impairment test, and the asset’s residual value, if any. The
Company uses its best judgment based on current facts and circumstances related to its business when applying
these impairment rules. To determine fair value, the Company uses its internal cash flow estimates discounted at
an appropriate interest rate, quoted market prices and royalty rates when available and independent appraisals, as
appropriate. The Company does not believe there is a reasonable likelihood that there will be a material change
in the future estimates or assumptions used to calculate long-lived asset impairment losses. However, if actual
results are not consistent with the Company’s estimates and assumptions used in calculating future cash flows
and asset fair values, the Company may be exposed to losses that could be material.
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