Harman Kardon 2007 Annual Report Download - page 59

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inventory are the basis for our inventory reserves and have an effect on our results of operations. See Note
2, Inventories, for additional information.
Property, Plant and Equipment. Property, plant and equipment is stated at cost or, in the case of
capitalized leases, at the present value of the future minimum lease payments. Depreciation and
amortization of property, plant and equipment is computed primarily using the straight-line method over
useful lives estimated from 1 to 50 years or over the term of the lease, whichever is shorter. Buildings and
improvements are depreciated over 1 to 50 years, machinery and equipment are depreciated over 3 to 20
years and furniture and fixtures are depreciated over 3 to 10 years. See Note 3, Property, Plant and
Equipment, for additional information.
Goodwill. Goodwill was $403.7 million at June 30, 2007 compared with $381.2 million at June 30,
2006. The increase is primarily due to contingent consideration and deferred purchase price payments
paid during fiscal 2007 associated with prior fiscal year acquisitions. Currency translation also
contributed to the increase. Our SFAS 142 annual impairment test concluded that goodwill was not
impaired as of the test date, April 30, 2007.
In fiscal 2006, goodwill increased $36.1 million, which was mainly due to the acquisition of PhatNoise
and our investment in a joint venture in Korea. Contingent consideration associated with the acquisition
of Innovation Systems in a prior fiscal year also contributed to the increase in goodwill.
Pre-Production and Development Costs. We incur pre-production and development costs primarily
related to infotainment systems that we develop for automobile manufacturers pursuant to long-term
supply agreements. We record certain costs incurred pursuant to these agreements as unbilled costs in
accordance with EITF Issue No. 99-5, Accounting for Pre-Production Costs Related to Long-Term Supply
Agreements, or the percentage-of-completion method of AICPA Statement of Position (“SOP”) 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Unbilled
costs at June 30, 2007 were $30.8 million, including $14.5 million of pre-production costs and $16.3
million of costs under development contracts. Unbilled costs reimbursable in the next twelve months total
$10.3 million and are recorded in Other current assets. Unbilled costs reimbursable in subsequent years
total $20.5 million and are recorded in Other assets. At June 30, 2007, we had fixed assets of $21.2
million for molds, dies and other tools which our customers will eventually purchase and own pursuant to
long-term supply contracts.
At June 30, 2006, total unbilled costs were $34.4 million, including $4.2 million of pre-production costs
and $30.2 million of costs under development contracts. At June 30, 2006, unbilled costs reimbursable in
the next twelve months totaled $11.5 million and were recorded in Other current assets. Unbilled costs
reimbursable in subsequent years totaled $22.9 million and were recorded in Other assets.
Purchased and Deferred Software Costs. Software costs that are related to conceptual formulation and
incurred prior to the establishment of technological feasibility are expensed as incurred. Costs incurred to
purchase software to be sold as an integral component of a product are deferred until the product is sold.
Software development costs incurred subsequent to establishment of technological feasibility and which
are considered recoverable by management are deferred in compliance with SFAS No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, and amortized over the
product’s life, usually three years. There were no deferred costs at June 30, 2007. At June 30, 2006,