Creative 2004 Annual Report Download - page 10

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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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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