Creative 2005 Annual Report Download - page 26

26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)
Management performs a detailed assessment of inventory at each balance sheet date to establish provisions for excess and obsolete
inventories. The evaluation includes a review of, among other factors, historical sales, current economic trends, forecasted sales,
demand requirements, product lifecycle and product development plans, quality issues, and current inventory levels.
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.
Investments
Creative holds equity investments in various companies pursuant to which it has acquired anywhere from less than 1% to 100% of the
issuer’s outstanding capital stock. Investments in which Creative acquires more than 50% of the outstanding capital stock of an entity,
or which are under the effective control of Creative, are treated as investments in subsidiaries, and the balance sheets and results of
operations of these subsidiaries are fully consolidated after making allowance for any minority interests. Companies in which Creative’s
investment totals between 20% and 50% of such company’s capital stock are treated as associated companies and recorded on an equity
basis, whereby Creative adjusts its cost of investments to recognize its share of all post acquisition results of operations. In the event
where the subsidiary or associated companies issue shares to third parties at prices different from Creative’s carrying value of such
shares, the differences are taken to the income statement directly.
Non-quoted investments of less than 20% in an entity are carried at cost, less provisions for permanent impairment where necessary.
In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” quoted investments of less than
20% in an entity are classified as available-for-sale. Such investments are reported at fair value with the unrealized gains and losses
included as a separate component of shareholders’ equity. Unrealized losses are charged against income when a decline in fair value
is determined to be other than temporary. Realized gains and losses upon the sale or disposition of such investments are based on the
average cost of the specific investments sold.
The investment portfolio is monitored on a periodic basis for impairment. Creative’s investments in these companies are inherently risky
because the markets for the technologies or products they have under development are typically in the early stages and may never
develop. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-
than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. Fair values for investments
in public companies are determined using quoted market prices. Fair values for investments in privately-held companies are estimated
based upon one or more of the following: pricing models using historical and forecasted financial information and current market rates,
liquidation values, the values of recent rounds of financing, or quoted market prices of comparable public companies.
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.
A summary of investments is as follows (in US$’000):
As of June 30
2005 2004
Non-quoted equity investments $ 9,553 $ 3,504
Quoted equity investments 116,361 205,787
Total investments $ 125,914 $ 209,291