Creative 2011 Annual Report Download - page 33

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CREATIVE TECHNOLOGY LTD AND ITS SUBSIDIARIES
If actual experience of product returns or cost of repair differs from management’s estimates, revisions to the estimated
warranty provision would be required and could have a material effect on the Group’s future results of operations. The
Group’s warranty provision as at 30 June 2011 was US$1,467,000 (2010: US$$2,784,000).
(d) Valuation of inventories
The Group states inventories at the lower of cost and net realisable value. The Group records a write-down for inventories
of components and products which have become obsolete or are in excess of anticipated demand or net realisable value.
Management performs a detailed assessment of inventory at each balance sheet date to establish provisions for excess and
obsolete inventories. Management’s 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. The markets for PC peripherals and personal digital entertainment products are subject to a rapid and
unpredictable pace of product and component obsolescence and demand changes. If future demand or market conditions for
the Group’s products are less favourable than forecasted or if unforeseen technological changes negatively impact the utility
of component inventory, the Group may be required to record write-downs which would negatively affect gross margins in
the period when the writedowns are recorded and its operating results and nancial position could be adversely affected.
The carrying amount of the Group’s inventories at 30 June 2011 was US$44,089,000 (2010: US$46,120,000).
 (e) Impairmentofnancialassets,available-for-sale
The Group’s investments are inherently risky because the markets for the technologies or products that the companies 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 listed equity securities are determined using quoted market prices. Fair
values for unlisted equity securities are determined by using valuation techniques. The Group uses a variety of methods, such as
asset values, and makes assumptions that are based on market conditions existing at each balance sheet date.
In order to determine whether a decline in value is other-than-temporary, the Group evaluates, among other factors: the duration
and extent to which the fair value has been less than the carrying value; the nancial condition of and business outlook for the
company, including key operational and cash ow metrics, current market conditions and future trends in the company’s industry,
and the company’s relative competitive position within the industry; and the Group’s intent and ability to retain the investment
for a period of time sufcient to allow for any anticipated recovery in fair value. The carrying amount of the Group’s nancial
assets, available-for-sale at 30 June 2011 was US$36,476,000 (2010: US$33,895,000).
 (f) Impairmentofnon-nancialassets
The Group assesses whether there are any indicators of impairment for all non-nancial assets at each reporting date. Goodwill
and other intangibles are tested for impairment annually and at other times when such indicators exist. Other non-nancial
assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable.
When value-in-use calculations are undertaken, management must estimate the expected future cash ows from the asset
or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash ows.
(g) Assessment of the probability of the outcome of current litigation
The Group records provisions for loss contingencies when it is probable that a liability has been incurred and the amount
of loss can be reasonably estimated.
(h) Income taxes
In preparing its nancial statements, the Group estimates its income taxes for each of the jurisdictions in which it operates. This
involves estimating the actual current tax exposure, assessing temporary differences resulting from differing treatment of items,
such as reserves and provisions for tax and accounting purposes and accounting for uncertainty in income taxes. These differences
result in current and deferred income tax liabilities, which are included within the Group’s consolidated balance sheet. The Group
recognises deferred income tax assets on carried forward tax losses to the extent there are sufcient estimated future taxable prots
and/or taxable temporary differences against which the tax losses can be utilised. The Group’s income tax liabilities were US$790,000
(2010: US$2,235,000) and deferred income tax liabilities were US$17,902,000 (2010: US$21,202,000) at 30 June 2011.