Callaway 2015 Annual Report Download - page 82

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F-12
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 and goodwill and intangible assets. 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's primary advertising costs are from television and print media advertisements. The Company’s policy is
to expense advertising costs, including production costs, as incurred. Advertising expenses for 2015, 2014 and 2013 were
$57,392,000, $55,502,000 and $53,707,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs for 2015, 2014 and 2013
were $33,213,000, $31,285,000 and $30,937,000, respectively.
Foreign Currency Translation and Transactions
A significant portion of the Company’s business is conducted outside of the United States in currencies other than the
U.S. dollar. As a result, changes in foreign currency exchange rates can have a significant effect on the Company’s financial
results. Revenues and expenses that are denominated in foreign currencies are translated using the average exchange rate for
the period. Assets and liabilities are translated at the rate of exchange on the balance sheet date. Gains and losses from assets
and liabilities denominated in a currency other than the functional currency of the entity on which they reside are generally
recognized currently in the Company's statements of operations. Gains and losses from the translation of foreign subsidiary
financial statements into U.S. dollars are included in accumulated other comprehensive income or loss (see Accumulated
Other Comprehensive Income policy below).
The Company recorded a net loss in foreign currency transactions of $1,611,000, $6,198,000 and $821,000 in 2015,
2014 and 2013, respectively.
Derivatives and Hedging
In order to mitigate the impact of foreign currency translation on transactions, the Company uses foreign currency
forward contracts that are accounted for as non-designated and designated hedges pursuant to ASC Topic 815, “Derivatives
and Hedging” ("ASC Topic 815"). ASC Topic 815 requires that an entity recognize all derivatives as either assets or liabilities
in the balance sheet, measure those instruments at fair value and recognize changes in the fair value of derivatives in earnings
in the period of change unless the derivative qualifies as designated cash flow hedge that offsets certain exposures. Certain
criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as a cash flow hedge.
Gains and losses from the remeasurement of qualifying cash flow hedges are recorded as a component of other comprehensive
income and released into earnings as a component of cost of goods sold or net sales during the period in which the hedged
transaction takes place. Gains and losses on the ineffective portion of hedges (hedges that do not meet accounting requirements
due to ineffectiveness) and derivatives that are not elected for hedge accounting treatment are immediately recorded in earnings
as a component of other income (expense).
Cash and Cash Equivalents
Cash equivalents are highly liquid investments purchased with original maturities of three months or less.