Creative 1999 Annual Report Download - page 26

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Revenue recognition
Creative generally sells its product FOB (Free On Board) Creative’s warehouse. As a result, revenue is recognized upon delivery of the
products to a third-party shipper, freight forwarder or customer, which is when title to the product transfers to the purchaser. Allowances
are established and regularly reviewed by management to reflect an estimate of future sales returns from customers and expected price
adjustments for sales to distributors.
Research and development
Research and development costs are charged to operations as incurred.
Income taxes
Deferred tax assets and liabilities, net of valuation allowances, are established for the expected future tax consequences of events resulting
from the differences between the financial reporting and income tax bases of Creative’s assets and liabilities and from tax credit carry
forwards. No provision has been made for the undistributed earnings of Creative’s subsidiaries outside of Singapore since it is Creative’s
intention to reinvest these earnings in those subsidiaries. Reinvested earnings of such subsidiaries have been immaterial to date.
Concentrations of credit risk
Financial instruments that potentially subject Creative to significant concentrations of credit risk consist principally of cash and cash
equivalents and trade accounts receivable. Creative limits the amount of credit exposure to any one financial institution. Creative sells
its products to original equipment manufacturers, distributors and key retailers. Creative believes that the concentration of credit risk
in its trade receivables is substantially mitigated due to performance of ongoing credit evaluations of its customers’ financial condition,
use of short collection terms, use of letters of credit in certain circumstances, procurement of credit insurance coverage and the geographical
dispersion of sales. Creative maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable.
Stock-based compensation
Creative accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Accordingly, compensation expense for stock option is
measured as the excess, if any, of the market price of Creative’s stock at the date of the grant over the stock option exercise price. In addition,
Creative provides pro forma disclosures as required under SFAS 123, “Accounting for Stock-Based Compensation”. See Note 8.
Recently issued accounting pronouncements
In June 1998, the FASB issued SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”. This Statement requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values
of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS
133 will be effective for Creative’s fiscal year ending June 30, 2000. Management believes that this Statement will not have a significant
impact on the Company.
Notes to Consolidated Financial Statements