Callaway 2011 Annual Report Download - page 40

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements, the
related notes and the “Important Notice to Investors” that appear elsewhere in this report.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its results of operations, financial condition and liquidity are
based upon the Company’s consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities,
shareholders’ equity, sales and expenses, as well as related disclosures of contingent assets and liabilities. The
Company bases its estimates on historical experience and on various other assumptions that management
believes to be reasonable under the circumstances. Actual results may materially differ from these estimates
under different assumptions or conditions. On an ongoing basis, the Company reviews its estimates to ensure that
the estimates appropriately reflect changes in its business and new information as it becomes available.
Management believes the critical accounting policies discussed below affect its more significant estimates
and assumptions used in the preparation of its consolidated financial statements. For a complete discussion of all
of the Company’s significant accounting policies, see Note 2 “Significant Accounting Policies” to the Notes to
Consolidated Financial Statements in this Form 10-K.
Revenue Recognition
Sales are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 605, “Revenue
Recognition,” as products are shipped to customers, net of an allowance for sales returns and accruals for sales
programs. The Company records a reserve for anticipated returns through a reduction of sales and cost of sales in
the period that the related sales are recorded. Sales returns are estimated based upon historical returns, current
economic trends, changes in customer demands and sell-through of products. In addition, from time to time, the
Company offers sales programs that allow for specific returns. The Company records a reserve for anticipated
returns related to these sales programs based on the terms of the sales program as well as historical returns,
current economic trends, changes in customer demands and sell-through of products. Historically, the Company’s
actual sales returns have not been materially different from management’s original 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 the allowance for sales returns. However, if the actual costs of sales returns are
significantly different than the recorded estimated allowance, the Company may be exposed to losses or gains
that could be material. Assuming there had been a 10% increase over the recorded estimated allowance for 2011
sales returns, pre-tax loss for the year ended December 31, 2011 would have been increased by approximately
$3.5 million.
The Company also records estimated reductions to revenue for sales programs such as incentive offerings.
Sales program accruals are estimated based upon the attributes of the sales program, management’s forecast of
future product demand, and historical customer participation in similar programs. The Company’s primary sales
program, “the Preferred Retailer Program,” offers longer payment terms during the initial sell in period, as well
as potential rebates and discounts, for participating retailers in exchange for providing certain benefits to the
Company, including the maintenance of agreed upon inventory levels, prime product placement and retailer staff
training. Under this program, qualifying retailers can earn either discounts or rebates based upon the amount of
product purchased. Discounts are applied and recorded at the time of sale. For rebates, the Company accrues an
estimate of the rebate at the time of sale based on the customer’s estimated qualifying current year product
purchases. The estimate is based on the historical level of purchases, adjusted for any factors expected to affect
the current year purchase levels. The estimated year-end rebate is adjusted quarterly based on actual purchase
levels, as necessary. The Preferred Retailer Program is generally short term in nature and the actual costs of the
program are known as of the end of the year and paid to customers shortly after year-end. In addition to the
Preferred Retailer Program, the Company from time to time offers additional sales program incentive offerings
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