Creative 2000 Annual Report Download - page 21

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21
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Fair value of financial instruments
Creative measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain
of Creative’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses,
the carrying amounts approximate fair value due to their short maturities. The amounts shown for long term obligations
also approximate fair value because current interest rates charged to Creative for debts of similar maturities are substantially
the same.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using standard cost, appropriately adjusted at balance
sheet date to approximate weighted average basis. In the case of finished products and work-in-progress, cost includes
materials, direct labor and an appropriate proportion of production overheads.
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, 2000 and 1999, included in other assets and prepaids were prepaid royalties of $2.4 million and $3.1 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 less accumulated depreciation. 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. No depreciation is provided on freehold land and
construction in progress.