Callaway 2009 Annual Report Download - page 43

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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 or exceeds its fair value. 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.
To determine fair value, the Company uses its internal cash flow estimates discounted at an appropriate rate,
quoted market prices, royalty rates when available and independent appraisals as appropriate. Any required
impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value and is
recorded as a reduction in the carrying value of the asset and a charge to earnings.
The Company uses its best judgment based on current facts and circumstances related to its business when
making these estimates. 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.
During the second half of 2008 and into 2009, general economic and stock market conditions worsened
considerably and the Company’s stock price declined significantly during this period. During the second quarter
of 2009, the Company’s market capitalization fell below its recorded book value. As a result, during the second
quarter of 2009, the Company performed an impairment analysis of goodwill and other indefinite-lived
intangible assets. Based on the results of the impairment analysis, no impairment was identified as of June 30,
2009. In addition, during the fourth quarter of 2009, the Company performed its annual impairment analysis of
goodwill and other indefinite-lived intangible assets held throughout the year. Based on this testing, there was no
impairment as of December 31, 2009.
Warranty Policy
The Company has a stated two-year warranty policy for its golf clubs. 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 2009 warranty obligation, pre-tax loss for the year ended
December 31, 2009 would have been increased by approximately $0.9 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
30