Callaway 2010 Annual Report Download - page 43

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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 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 fourth quarter of 2010, the Company conducted its annual impairment test on its goodwill and
intangible assets, including the trade names, trademarks and other intangible assets the Company acquired in
2003 as part of the acquisition of the assets of TFGC Estate, Inc. (f/k/a The Top-Flite Golf Company). In
completing the impairment analysis, the Company determined that the discounted expected cash flows from the
trade names and trademarks associated with the acquisition was $7.5 million less than the carrying value of those
assets. As a result, the Company recorded an impairment charge of $7.5 million during the fourth quarter of
2010. For further discussion, see Note 9 to the Consolidated Financial Statements—“Goodwill and Intangible
Assets” in this Form 10-K.
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 2010 warranty obligation, pre-tax loss for the year ended
December 31, 2010 would have been increased by approximately $0.8 million.
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