Callaway 2011 Annual Report Download - page 42

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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. 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. As of December 31, 2011, the fair values of the Company’s reporting units in the U.S.,
United Kingdom, Canada and Korea, as well as the fair value of certain trade names and trademarks substantially
exceeded their carrying values. However, during the second quarter of 2011, the Company determined that the
discounted expected cash flows from 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) were
$5.4 million less than the carrying value of those assets. As a result, the Company recorded an impairment charge
of $5.4 million to reduce the carrying value of these assets. In addition, in the fourth quarter of 2011, the
Company conducted an impairment test on goodwill related to its reporting unit in Australia. In completing the
impairment analysis, the Company determined that the discounted expected cash flows from this subsidiary were
$1.1 million less than the subsidiary’s net book value including goodwill. As a result, the Company recorded an
impairment charge of $1.1 million to write-off the goodwill balance. For further discussion, see Note 9 to the
Notes 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, the Company’s warranty obligation calculation is based upon long-term historical
warranty rates of similar products 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 over the 2011 recorded estimated allowance for warranty obligations, pre-tax loss for
the year ended December 31, 2011 would have been increased by approximately $0.8 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
28