Creative 2005 Annual Report Download - page 8

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between 20% and 50% of such company’s capital stock are treated as associated companies and recorded on an equity basis,
whereby the cost of investment is adjusted to recognise Creative’s share of all post acquisition results of operations.
As for investments of less than 20%, non-quoted investments are carried at cost, less provisions for permanent impairment
where necessary, and quoted investments are reported at fair value with the unrealised gains and losses included as a
separate component of shareholders’ equity. 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.
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 judgements 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 is 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 goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events
or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets.” 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’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 combination of market comparable method,
and 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. Additionally, in response to changes in the PC peripherals and consumer
electronics industries and changes in global or regional economic conditions, Creative may strategically realign its resources
and consider restructuring, disposing, or otherwise exiting businesses, which could result in an impairment of property, plant
and equipment, identifiable intangibles or goodwill.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
VALUATION OF INVESTMENTS (Cont’d)