Creative 2008 Annual Report Download - page 7

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REVENUE RECOGNITION
Revenue from product sales is recognised when the following four criteria are met:
• Persuasive evidence of an arrangement exists
Persuasive evidence of an arrangement exists when Creative receives a purchase order from the customer and Creative
subsequently confirms the order by issuing a sales order to the customer.
• Title and risk of loss have been transferred and delivery has occurred
Based on the shipping terms specified in the customer’s purchase order or Creative’s sales order to the customer, this
criteria is met when a product is delivered to a common carrier, or delivered to the customer’s delivery site or shipped
to the customer.
• The price is fixed or determinable
The price is fixed or determinable when a sales order is issued to the customer.
• Collection is probable
Creative assesses the credit worthiness of each customer and will only issue a sales order to a customer if it believes
that collection from that customer is probable.
Allowances are provided for estimated returns, discounts and warranties. Management analyzes historical returns, current
economic trends and changes in customer demand and acceptance of its products when evaluating the adequacy of the sales
returns allowance. 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. Significant management judgment and
estimates must be used in connection with establishing these allowances in any accounting period. Creative may take
action when necessary in response to market conditions to increase customer incentive offerings, possibly resulting in an
incremental reduction of revenue at the time the incentive is offered.
ALLOWANCES FOR DOUBTFUL ACCOUNTS, RETURNS AND DISCOUNTS
Creative distributes its products primarily through third party resellers. Creative establishes allowances for doubtful
accounts, returns and discounts for specifically identified doubtful accounts, returns and discounts based on credit profiles
of its customers, current economic trends, contractual terms and conditions and historical payment, return and discount
experience. Management performs ongoing credit evaluations of customers’ financial condition and uses letters of credit in
certain circumstances. Credit insurance coverage is obtained when coverage is available and feasible. However, Creative is
not able to procure credit insurance coverage for all customers as insurers have excluded certain customers and geographic
markets. In the event actual returns, discounts and bad debts differ from the company’s estimates, or Creative adjusts these
estimates in future periods, its operating results and financial position could be adversely affected.
PRODUCT WARRANTIES
The warranty period for the bulk of Creative’s products typically ranges between 1 to 3 years. The product warranty accrual
reflects management’s best estimate of probable liability under its product warranties. Management determines the warranty
provision based on known product failures (if any), historical experience, and other currently available evidence. If actual
experience of product returns or cost of repair differ from the management’s estimates, revisions to the estimated warranty
liability would be required and could have a material effect on Creative’s future results of operations.