Creative 2001 Annual Report Download - page 19

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Marketable Securities
Creative determines the appropriate classification of marketable securities at the time of acquisition and evaluates
such designation at each balance sheet date. For all periods presented, Creative has classified marketable securities
as trading securities, and accordingly such securities are stated at their market values based on the last transacted
prices at each balance sheet date. The resulting net unrealized gains or losses on marketable securities are included
in earnings in the period they are incurred.
Fair value of financial instruments
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 actual cost on a 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, 2001 and 2000, prepaid royalties of $7.1 million and $2.4 million were
included in other assets and prepaids. 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.