Creative 1999 Annual Report Download - page 25

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Inventory
Inventory is stated at the lower of cost (first-in-first-out) or market.
License agreements
Creative has entered into certain license agreements requiring prepayment of royalties for a certain term, or a guaranteed minimum royalty
regardless of actual sales over the term of the agreement. Creative has adopted a policy of capitalizing and amortizing prepaid royalties.
Amortization of prepaid balances and accrual of guaranteed minimum commitments commence with the product introduction and are
at rates based on the greater of the straight line basis over the term of the agreement or the ratio of the actual revenues achieved to the
revenues anticipated to be earned during the term of the agreement. At June 30, 1999 and 1998, included in other assets and prepaids
were prepaid royalties of $3.1 million and $2.3 million, respectively. Management regularly reviews the net realizable value of its prepaid
royalties and adjusts recorded amounts to reflect changes in estimated utilization.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the shorter of the remaining facility lease term or the estimated useful lives of
the improvements.
Intangible assets
Intangible assets are stated at cost and relate principally to the acquisition of new subsidiaries accounted for under the purchase method.
Under this method, the purchase price has been allocated to the assets acquired, liabilities assumed and in-process technology based on
their estimated fair market values at the dates of acquisition. Amortization is computed using the straight-line method over the estimated
useful lives of the assets, ranging from one to seven years. Creative regularly reviews the net realizable value of its intangible assets and
various assumptions underlying the expected sales revenue and net cash flow to be derived from such intangibles. Where projected cash
flow is not sufficient to recover the net value of the intangible, a provision for impairment is recorded. At June 30, 1999 and 1998, amounts
capitalized in connection with these acquisitions were $66.5 million and $98.3 million and their related accumulated amortization totaled
$43.5 million and $57.3 million, respectively.
Investments
Creative has made equity investments in various companies pursuant to which it has acquired anywhere from 2% to 100% of the issuer’s
outstanding capital stock. Investments in which Creative acquires more than 50% of the outstanding capital stock of an entity, or which
are under the effective control of Creative, are treated as investments in subsidiaries, and the balance sheets and results of operations of
these subsidiaries are fully consolidated after making allowance for any minority interests. Companies in which Creative’s investment totals
between 20% and 50% of such company’s capital stock are treated as associated companies and recorded on an equity basis, whereby Creative
adjusts its cost of investments to recognize its share of all post acquisition results of operations. In accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), “Accounting for Certain Investments in Debt and Equity Securities”, investments of less than
20% in an entity are classified as available-for-sale and therefore are reported at fair value with the unrealized gains and losses included
as a separate component of shareholders’ equity. Realized gains and losses upon the sale or disposition of such investments are based on
average cost of the specific investments sold. Management determines the appropriate classification of securities at the time of purchase
and reevaluates the classification at each reporting date. For non-quoted investments, management regularly reviews the assumptions
underlying related sales, net income and cash flow forecasts and other factors used in assessing the carrying values of such investments.
Notes to Consolidated Financial Statements