Creative 2003 Annual Report Download - page 9

8
VALUATION OF INVESTMENTS (Cont’d)
In order to determine whether a decline in value is other-than-temporary, Creative evaluates, among other factors: the
duration and extent to which the fair value has been less than the carrying value; the financial condition of and business
outlook for the company, including key operational and cash flow metrics, current market conditions and future trends
in the company’s industry, and the company’s relative competitive position within the industry; and Creative’s intent and
ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Creative uses the purchase method of accounting for business combinations, in line with Financial Accounting Standards Board’s
(“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 141 “Business Combinations.” The purchase method of
accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price paid to
the fair value of the net tangible and intangible assets acquired, including in-process technology. The allocation of the purchase
price was based on independent appraisals. The amounts and useful lives assigned to intangible assets could impact future
amortization; the amount assigned to in-process technology is expensed immediately. If the assumptions and estimates used to
allocate the purchase price are not correct, purchase price adjustments or future asset impairment charges could be required.
Creative reviews for impairment of goodwill on an annual basis. Reviews for impairment of goodwill and other intangible
assets are also conducted whenever events indicate that the carrying amount might not be recoverable. Factors that
Creative may consider important which could trigger an impairment review include the followings:
• significant under performance relative to expected historical or projected future operating results;
• significant changes in the manner of use of the acquired assets or the strategy for Creative’s overall business;
• significant negative industry or economic trends;
• significant decline in Creative’s stock price for a sustained period; and
• Creative’s market capitalization relative to net book value.
When the existence of one or more of the above factors indicate that the carrying value of goodwill and other intangibles assets
may be impaired, Creative measures the amount of impairment based on a projected discounted cash flow method using a
discount rate determined by the management to be commensurate with the risk inherent in Creative’s current business model.
ASSESSMENT OF THE PROBABILITY OF THE OUTCOME OF CURRENT LITIGATION
Creative records accruals for loss contingencies when it is probable that a liability has been incurred and the amount of
loss can be reasonably estimated.
ACCOUNTING FOR INCOME TAXES
In preparation of the financial statements, Creative estimates its income taxes for each of the jurisdictions in which it operates.
This involves estimating the actual current tax exposure and assessing temporary differences resulting from differing treatment
of items, such as reserves and accruals for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within Creative’s consolidated balance sheet. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets and liabilities and future taxable income for purposes of
assessing the ability to realize any future benefit from its deferred tax assets. Valuation allowance is provided for Creative’s
deferred tax assets as management believes substantial uncertainty exists regarding the realizability of these assets.
The Singapore corporate income tax rate is currently at 22.0%, the rate at which Creative is providing taxes on Singapore
income. Creative was granted a Pioneer Certificate in 1990 under which income classified as pioneer status income is
exempt from tax in Singapore, subject to certain conditions. As the Pioneer Certificate expired in March 2000, Creative
has applied for a separate and new Pioneer Certificate. If Creative is awarded this new Pioneer Certificate, the effective
tax rate will be reduced as profits under the new Pioneer Certificate will be exempted from tax in Singapore.
In the event that actual results differ from these estimates or Creative adjust these estimates in future periods, its operating
results and financial position could be materially affected.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS