Callaway 2007 Annual Report Download - page 78

Warranty Policy
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. The following table provides a reconciliation of the activity related to the Company’s reserve for
warranty expense:
Year Ended December 31,
2007 2006 2005
(In thousands)
Beginning balance ................................................. $13,364 $ 13,267 $12,043
Provision ........................................................ 10,504 11,696 10,965
Claims paid/costs incurred .......................................... (11,482) (11,599) (9,741)
Ending balance ................................................... $12,386 $ 13,364 $13,267
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, trade receivables and payables,
forward foreign currency exchange contracts (see Note 8) and its financing arrangements (see Note 7). The
carrying amounts of these instruments approximate fair value because of their short-term maturities and variable
interest rates.
Advertising Costs
The Company advertises primarily through television and print media. The Company’s policy is to expense
advertising costs, including production costs, as incurred. Advertising expenses for 2007, 2006 and 2005 were
$52,203,000, $47,599,000 and $60,404,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs for 2007, 2006
and 2005 were $32,020,000, $26,785,000 and $26,989,000, respectively.
Foreign Currency Translation and Transactions
The Company’s foreign subsidiaries utilize their local currency as their functional currency. The accounts of
these foreign subsidiaries have been translated into United States dollars using the current exchange rate at the
balance sheet date for assets and liabilities and at the average exchange rate for the period for revenues and
expenses. Cumulative translation gains or losses are recorded as accumulated other comprehensive income in
shareholders’ equity. Gains or losses resulting from transactions that are made in a currency different from the
functional currency are recognized in earnings as they occur or, for hedging contracts, when the underlying
hedged transaction affects earnings. The Company recorded net foreign currency transaction gains of $158,000
and $251,000 in 2007 and 2006, respectively, and a net foreign currency transaction loss of $2,441,000 in 2005,
in interest and other income, net.
Derivatives and Hedging
The Company enters into derivative financial instrument contracts only for hedging purposes and accounts
for them in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 133 “Accounting for
Derivative Instruments and Hedging Activities,” and its amendments SFAS No. 137, “Accounting for Derivative
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