Callaway 2012 Annual Report Download - page 86

Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a
liability (the exit price) in the principle and most advantageous market for the asset or liability in an orderly
transaction between market participants. The Company measures and discloses the fair value of nonfinancial and
financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair
value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect
market data obtained from independent sources, while unobservable inputs reflect the Company’s market
assumptions. This hierarchy requires the use of observable market data when available. The measurement of
assets and liabilities at fair value are classified using the following three-tier hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities;
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which significant inputs and
significant value drivers are observable in active markets; and
Level 3: Fair value measurements derived from valuation techniques in which one or more significant inputs
or significant value drivers are unobservable.
The Company measures fair value using a set of standardized procedures that are outlined herein for all
assets and liabilities which are required to be measured at fair value. When available, the Company utilizes
quoted market prices from an independent third party source to determine fair value and classifies such items in
Level 1. In some instances where a market price is available, but the instrument is in an inactive or over-the-
counter market, the Company consistently applies the dealer (market maker) pricing estimate and uses a midpoint
approach on bid and ask prices from financial institutions to determine the reasonableness of these estimates.
Assets and liabilities subject to this fair value valuation approach are typically classified as Level 2.
Items valued using internally-generated valuation techniques are classified according to the lowest level
input that is significant to the fair value measurement. As a result, the asset or liability could be classified in
either Level 2 or Level 3 even though there may be some significant inputs that are readily observable. The
Company utilizes a discounted cash flow valuation model whenever applicable to derive a fair value
measurement on long-lived assets, goodwill and amortizing intangibles. 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. The Company also considers its counterparty’s and own credit risk on derivatives and
other liabilities measured at their fair value.
Advertising Costs
The Company advertises primarily through television and print media. The Company’s policy is to expense
advertising costs, including production costs, as incurred. Advertising expenses for 2012, 2011 and 2010 were
$65,068,000, $53,051,000 and $48,432,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs for 2012, 2011
and 2010 were $29,542,000, $34,309,000 and $36,383,000, respectively.
Foreign Currency Translation and Transactions
The Company’s foreign subsidiaries utilize their local currency as their functional currency. The accounts of
these foreign subsidiaries have been translated into United States dollars using the current exchange rate at the
balance sheet date for assets and liabilities and at the average exchange rate for the period for revenues and
expenses. Cumulative translation gains or losses are recorded as accumulated other comprehensive income in
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