Creative 2004 Annual Report Download - page 27

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Goodwill and other intangible assets
Goodwill and other intangible assets are stated at cost and relate principally to the acquisition of new subsidiaries accounted for under the
purchase method. Under this method, the purchase price has been allocated to the assets acquired, liabilities assumed and in-process
technology based on their estimated fair market values at the dates of acquisition. Amounts allocated to acquired in-process technology
are expensed in the period in which the acquisition is consummated. The goodwill and identifiable intangible assets acquired in connection
with the acquisition of 3Dlabs have been accounted for in accordance with SFAS 141 and SFAS 142, “Business Combinations” and
“Goodwill and Other Intangible Assets,” respectively. Intangible assets are amortized on a straight line basis over the estimated useful lives
of the assets, ranging from one to seven years. Goodwill is not subject to amortization, but evaluated at least annually for impairment.
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 following:
•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 market capitalization relative to net book value.
When the existence of one or more of the above factors indicates that the carrying value of the goodwill or intangible assets may be
impaired, Creative measures any impairment based on a projected discounted cash flow method using a discount rate determined by
the management to commensurate with the risk inherent in Creative’s current business model. Creative performed its annual assessment
for goodwill impairment traditionally in the fourth quarter of the fiscal year. However, during the third quarter, management noted that
the revenue for the reporting unit that was assigned the goodwill came below expectations in the first three quarters of the year, owing
to a delay in the launch of new product. As this may impact the fair value of this reporting unit, the Company performed a stage 1
impairment review of the goodwill as at March 31, 2004, by comparing the fair value of the reporting unit to its book value including
goodwill, in accordance with the requirements of SFAS 142 “Goodwill and Other Intangible Assets.” Based on the result of the review,
the fair value of the reporting unit still exceeded its book value, and therefore goodwill was considered not impaired. Stage 2 of the
impairment review was thus deemed unnecessary. As there were no deterioration in the business conditions of the reporting unit and
the external environment it operates in between March 31 and June 30, 2004, no further impairment test of goodwill was deemed
necessary.
Revenue recognition
Creative generally recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss transferred, 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.
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.
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.