Callaway 2008 Annual Report Download - page 43

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, 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.
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 Company’s estimates for calculating the warranty reserve are principally based on assumptions
regarding the warranty costs of each club product line over the expected warranty period, where little or no
claims experience may exist. Experience has shown that warranty rates can vary between product models.
Therefore, the Company’s warranty obligation calculation is based upon long-term historical warranty rates until
sufficient data is available. As actual model-specific rates become available, the Company’s estimates are
modified to ensure that the forecast is within the range of likely outcomes.
Historically, the Company’s actual warranty claims have not been materially different from management’s
original estimated warranty obligation. 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 warranty obligation.
However, if the number of actual warranty claims or the cost of satisfying warranty claims significantly exceeds
the estimated warranty reserve, the Company may be exposed to losses that could be material. Assuming there
had been a 10% increase in the Company’s 2008 warranty obligation, pre-tax income for the year ended
December 31, 2008 would have been reduced by approximately $1.2 million.
Income Taxes
Current income tax expense or benefit is the amount of income taxes expected to be payable or receivable
for the current year. A deferred income tax asset or liability is established for the difference between the tax basis
of an asset or liability computed pursuant to Financial Accounting Standards Board (“FASB”) Statement
No. 109, “Accounting for Income Taxes”, and its reported amount in the financial statements that will result in
taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or
settled, respectively. The Company provides a valuation allowance for its deferred tax assets when, in the opinion
of management, it is more likely than not that such assets will not be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need
for the valuation allowance, in the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise, should the Company determine
that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such determination was made.
Effective January 1, 2007, the Company was required to adopt and implement the provisions of
Interpretation 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”
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