Callaway 2015 Annual Report Download - page 41

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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 were to significantly exceed the estimated warranty reserve, the
Company may be exposed to losses that could be material. Assuming there had been a 10% increase in warranty claims over
the 2015 recorded estimated allowance for warranty obligations, pre-tax income for the year ended December 31, 2015 would
have decreased by approximately $0.6 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 due to losses generated in the United States. 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 and creating a significant one-time non-cash tax
benefit in the period that such conclusion is reached. Prospectively, the Company would then report an effective U.S. income
tax rate that is closer to statutory rates. 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 significant 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.
The Company is required to file federal and state income tax returns in the United States and various other income tax
returns in foreign jurisdictions. The preparation of these income tax returns requires the Company to interpret the applicable
tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The
Company accrues an amount for its estimate of additional tax liability, including interest and penalties, for any uncertain tax
positions taken or expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain
tax positions as more definitive information becomes available. Historically, additional taxes paid as a result of the resolution
of the Company’s uncertain tax positions have not been materially different from the Company’s expectations.