Harman Kardon 2008 Annual Report Download - page 43

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25
Allowance for Doubtful Accounts
Our products are sold to customers in many different markets and geographic locations. Methodologies
for estimating bad debt reserves include specific reserves for known collectibility issues and percentages
applied to aged receivables based on historical experience. We must make judgments and estimates
regarding account receivables that may become uncollectible. These estimates affect our bad debt reserve
and results of operations. We base these estimates on many factors including historical collection rates,
the financial stability and size of our customers as well as the markets they serve and our analysis of aged
accounts receivable. Our judgments and estimates regarding collectibility of accounts receivable have an
impact on our financial statements.
Inventory Valuation
The valuation of inventory requires us to make judgments and estimates regarding excess, obsolete or
damaged inventories including raw materials, finished goods and spare parts. Our determination of
adequate reserves requires us to analyze the aging of inventories and the demand for parts and to work
closely with our sales and marketing staff to determine future demand and pricing for our products. We
make these evaluations on a regular basis and adjustments are made to the reserves as needed. These
estimates and the methodologies that we use have an impact on our financial statements.
Goodwill
We perform a goodwill impairment test on an annual basis. At June 30, 2008, our goodwill balance of
$436.4 million was not impaired. We made this determination based upon a valuation of our reporting
units, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other
Intangible Assets. The valuation took into consideration various factors such as our historical
performance, future discounted cash flows, performance of our competitors, market conditions and
current market valuations of Harman and peer companies. We cannot predict the occurrence of events that
might adversely affect the reported value of goodwill. These 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 our customer base, or a material negative change in our relationships with significant
customers. Please refer to Note 4, Goodwill, of our consolidated financial statements for additional
information regarding our goodwill balance and annual impairment test.
Pre-Production and Development Costs
We incur pre-production and development costs related to infotainment systems that we develop for
automobile manufacturers pursuant to long-term supply arrangements. Portions of these costs are
reimbursable under separate agreements and are recorded as unbilled costs on our balance sheet in other
current assets and other assets. We believe that the terms of our supply contracts and established
relationship with these automobile manufacturers reasonably assure that we will collect the reimbursable
portions of these contracts. Accounting for development costs under the percentage of completion method
requires us to make estimates of costs to complete projects. We review these estimates on a quarterly
basis. Unforeseen cost overruns or difficulties experienced during development could cause losses on
these contracts. Such losses are recorded once a determination is made that a loss will occur.