Callaway 2008 Annual Report Download - page 82

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,
2008 2007 2006
(In thousands)
Beginning balance ................................................ $12,386 $ 13,364 $ 13,267
Provision ........................................................ 9,698 10,504 11,696
Claims paid/costs incurred .......................................... (10,470) (11,482) (11,599)
Ending balance ................................................... $11,614 $ 12,386 $ 13,364
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 9) and its financing arrangements (see Note 8). The
carrying amounts of these instruments approximate fair value because of their short-term maturities and variable
interest rates. In addition, the Company has elected to purchase Company-owned life insurance in order to
support a deferred compensation plan that is offered to certain employees (see Note 13). The cash surrender
value of the Company-owned insurance policy approximates fair value because it represents the amount the
Company would receive from the insurance company upon the surrender of the policies.
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 2008, 2007 and 2006 were
$56,020,000, $52,203,000 and $47,599,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs for 2008, 2007
and 2006 were $29,370,000, $32,020,000 and $26,785,000, 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 (loss) 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 $519,000,
$158,000 and $251,000 in 2008, 2007 and 2006, respectively.
Derivatives and Hedging
The Company from time to time uses derivative financial instruments to manage its exposure to foreign
exchange rates. The derivative instruments are accounted for pursuant to Statement of Financial Accounting
F-8