Callaway 2013 Annual Report Download - page 38

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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 Regarding Forward-Looking Statements” 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 2013 sales returns, pre-tax loss for the year ended December 31, 2013 would have been increased by approximately
$0.7 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
which are also generally short term in nature. Historically the Company’s actual costs related to its Preferred Retailer
Program and other sales programs have not been materially different than its estimates.