Creative 2000 Annual Report Download - page 23

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
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 fair value 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 is effective for fiscal years beginning after June 15, 2000 and cannot
be applied retroactively. Creative does not believe that the adoption of SFAS 133 will have a material impact on its
consolidated financial statements.
In December 1999, the Securities and Exchange Commission’s (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) No.
101, “Revenue Recognition in Financial Statements.” SAB No. 101 provides the staff’s views in applying generally accepted
accounting principles to selected revenue recognition issues. SAB No. 101 must be implemented by Creative no later than
the fourth quarter of fiscal 2001 effective as of the first quarter of 2001. Creative does not believe that adoption of SAB
101 will have a significant impact on the consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, “Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25” (“FIN 44”). Among other issues,
FIN 44 clarifies (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence of various modifications to the terms
of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a
business combination. Creative currently complies with the provisions of FIN 44.