Garmin 2005 Annual Report Download - page 65

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Critical Accounting Policies and Estimates
General
The Company’s discussion and analysis of its financial condition and results of operations are based upon
the Company’s consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The presentation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to customer sales programs and incentives, product returns, bad debts,
inventories, investments, intangible assets, income taxes, warranty obligations, and contingencies and litigation.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgements about the carrying
value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition
The Company records estimated reductions to revenue for customer sales programs returns and incentive
offerings including rebates, price protection, promotions and other volume-based incentives. The reductions to
revenue are based on estimates and judgements using historical experience and expectation of future conditions.
Changes in these estimates could negatively affect the Company’s operating results. These incentives are accrued
for on a percentage of sales basis and reviewed periodically. If market conditions were to decline, the Company
may take actions to increase customer incentive offerings possibly resulting in an incremental reduction of revenue
at the time the incentive is offered.
Warranties
The Company’s products sold are generally covered by a warranty for periods ranging from one to two
years. The Company accrues a warranty reserve for estimated costs to provide warranty services. The Company’s
estimate of costs to service its warranty obligations is based on historical experience and expectation of future
conditions. To the extent the Company experiences increased warranty claim activity or increased costs associated
with servicing those claims, its warranty accrual will increase, resulting in decreased gross profit.
Inventory
The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
Investments
Investments are classified as available for sale and recorded at fair value, and unrealized investment gains
and losses are reflected in stockholders’ equity. Investment income is recorded when earned, and capital gains and
losses are recognized when investments are sold. Investments are reviewed periodically to determine if they have
suffered an impairment of value that is considered other than temporary. If investments are determined to be
impaired, a capital loss is recognized at the date of determination.
Testing for impairment of investments also requires significant management judgement. The identification
of potentially impaired investments, the determination of their fair value and the assessment of whether any decline
in value is other than temporary are the key judgement elements. The discovery of new information and the