Callaway 2012 Annual Report Download - page 44

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 2012 recorded estimated allowance for warranty obligations, pre-tax loss for
the year ended December 31, 2012 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
of an asset or liability computed pursuant to ASC Topic 740, “Income Taxes,” and its reported amount in the
financial statements that will result in taxable or deductible amounts in future years when the reported amount of
the asset or liability is recovered or settled, respectively. The Company maintains a valuation allowance for a
deferred tax asset when it is deemed to be more likely than not that some or all of the deferred tax asset will not
be realized. In evaluating whether a valuation allowance is required under such rules, the Company considers all
available positive and negative evidence, including prior operating results, the nature and reason for any losses,
its forecast of future taxable income, and the dates on which any deferred tax assets are expected to expire. These
assumptions require a significant amount of judgment, including estimates of future taxable income. These
estimates are based on the Company’s best judgment at the time made based on current and projected
circumstances and conditions. In 2011, as a result of this evaluation, the Company recorded a valuation
allowance against its U.S. deferred tax assets. At the end of each interim and annual reporting period, as the
U.S. deferred tax assets are adjusted upwards or downwards, the associated valuation allowance and income tax
expense are also adjusted. If sufficient positive evidence arises in the future, such as a sustained return to
profitability in the U.S. business, the valuation allowance could be reversed as appropriate, decreasing income
tax expense in the period that such conclusion is reached. The Company has concluded that with respect to non-
U.S. entities, there is sufficient positive evidence to conclude that the realization of its deferred tax assets is
deemed to be likely, and no allowances have been established.
In addition, the Company has discontinued recognizing income tax benefits related to its U.S. net operating
losses until it is determined that it is more likely than not that the Company will generate sufficient taxable
income to realize the benefits from its U.S. deferred tax assets.
Pursuant to ASC Topic 740-25-6, the Company is required to accrue for the estimated additional amount of
taxes for uncertain tax positions if it is deemed to be more likely than not that the Company would be required to
pay such additional taxes.
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