Creative 2002 Annual Report Download - page 30

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Revenue recognition
Creative generally recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, price
is fixed or determinable, and collectibility is probable. Allowances are provided for estimated returns, discounts and
warranties, based on historical experience, current economic trends and changes in customer demand and acceptance of
its products. Such allowances are adjusted periodically to reflect actual and anticipated experience. When recognizing
revenue, Creative records estimated reductions to revenue for customer and distributor programs and incentive offerings,
including price protection, promotions, other volume-based incentives and rebates.
Research and development
Research and development costs are charged to operations as incurred.
Restructuring costs and accruals for excess facilities
In accordance with the provisions of EITF Issue No. 94-3, “Accounting for Restructuring Charges,’’ and Staff Accounting
Bulletin No.100, “Restructuring and Impairment Charges,’’ Creative records restructuring costs when it commits to an exit
plan and significant changes to the exit plan are not likely. The estimated loss on facilities which Creative intends to
sublease is based on estimates of the timing and amount of sublease income. Creative reassesses this liability quarterly
based on market conditions.
Assessment of the probability of the outcome of current litigation
Creative record accruals for loss contingencies when it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated.
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
establishes allowances for doubtful accounts, returns and discounts for specifically identified doubtful accounts, returns
and discounts based on credit profiles of its customers, current economic trends, contractual terms and conditions and
historical payment, return and discount experience.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS