Graco 2005 Annual Report Download - page 26

Consolidated Financial Statements. The following sections describe the Company's critical accounting
policies.
Sales Recognition
Sales of merchandise and freight billed to customers are recognized when title passes and all
substantial risks of ownership change, which occurs either upon shipment or upon delivery based upon
contractual terms. Sales is net of provisions for cash discounts, returns, customer discounts (such as
volume or trade discounts), cooperative advertising and other sales related discounts.
Recovery of Accounts Receivable
The Company evaluates the collectibility of accounts receivable based on a combination of factors.
When aware of a speciÑc customer's inability to meet its Ñnancial obligations, such as in the case of
bankruptcy Ñlings or deterioration in the customer's operating results or Ñnancial position, the Company
records a speciÑc reserve for bad debt to reduce the related receivable to the amount the Company
reasonably believes is collectible. The Company also records reserves for bad debt for all other customers
based on a variety of factors, including the length of time the receivables are past due and historical
collection experience. If circumstances related to speciÑc customers change, the Company's estimates of
the recoverability of receivables could be further adjusted. As of December 31, 2005, the Company had
allowances for doubtful accounts of $31.8 million on $1,234.5 million of accounts receivable.
Inventory Reserves
The Company reduces its inventory value for estimated obsolete and slow moving inventory in an
amount equal to the diÅerence between the cost of inventory and the net realizable 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.
Goodwill and Other IndeÑnite-Lived Intangible Assets
The Company conducts its annual test of impairment for goodwill and indeÑnite life intangible assets
in the third quarter because it coincides with its annual strategic planning process for all of its businesses.
The Company also tests for impairment if events or circumstances indicate that it is more likely than not
that the fair value of a reporting unit or the indeÑnite life intangible asset is below its carrying amount.
The Company cannot predict the occurrence of certain events that might adversely aÅect the reported
value of goodwill and other intangible assets. Such events may include, but are not limited to, strategic
decisions made in response to economic and competitive conditions, the impact of the economic
environment on the Company's customer base, or a material negative change in its relationships with
signiÑcant customers.
The Company assesses the fair value of its reporting units for its goodwill and other indeÑnite lived
intangible assets (primarily trademarks and trade names) in its impairment tests, generally based upon a
discounted cash Öow methodology, or an actual sales oÅer received from a prospective buyer, if available.
The discounted cash Öows are estimated utilizing various assumptions regarding future revenue and
expenses, working capital, terminal value, and market discount rates. The underlying assumptions used are
consistent with those used in the strategic plan.
If the carrying amount of the reporting unit is greater than the fair value, goodwill impairment may
be present. The Company measures the goodwill impairment based upon the fair value of the underlying
assets and liabilities of the reporting unit, including any unrecognized intangible assets, and estimates the
implied fair value of goodwill. An impairment charge is recognized to the extent the recorded goodwill
exceeds the implied fair value of goodwill.
If the carrying amount of the intangible asset exceeds its fair value, an impairment charge is recorded
to the extent the recorded intangible asset exceeds the fair value.
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