Harman Kardon 2008 Annual Report Download - page 44

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Warranty Liabilities
We warrant our products to be free from defects in materials and workmanship for periods ranging from
six months to six years from the date of purchase, depending on the business segment and product. Our
dealers and warranty service providers normally perform warranty service in field locations and regional
service centers, using parts and replacement finished goods we supply on an exchange basis. Our dealers
and warranty service providers also install updates we provide to correct defects covered by our
warranties. Estimated warranty liabilities are based upon past experience with similar types of products,
the technological complexity of certain products, replacement cost and other factors. If estimates of
warranty provisions are no longer adequate based on our analysis of current activity, incremental
provisions are recorded. We take these factors into consideration when assessing the adequacy of our
warranty provision for periods still open to claim.
Income Taxes
Deferred income tax assets or liabilities are computed based on the temporary differences between the
financial statement and income tax basis of assets and liabilities using the statutory marginal income tax
rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses
or credits are based on the changes in the deferred income tax assets or liabilities from period to period.
We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more
likely than not to be realized. In determining the need for, and amount of, a valuation allowance, we
consider our ability to forecast earnings, future taxable income, carryback losses, if any, and tax planning
strategies. We believe the estimate of our income tax assets, liabilities and expense are critical accounting
estimates because if the actual income tax assets, liabilities and expenses differ from our estimates the
outcome could have a material impact on our results of operations.
Effective July 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
income taxes by prescribing rules for recognition, measurement and classification in our consolidated
financial statements of tax positions taken or expected to be taken in a tax return. For tax benefits to be
recognized under FIN 48, a tax position must be more-likely-than-not to be sustained upon examination
by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater
than 50% likely of being realized upon settlement. The cumulative effect of applying the recognition and
measurement provisions upon adoption of FIN 48 resulted in a decrease of $7.2 million of unrealized tax
benefits to our balance of $31.2 million. This reduction was included as an increase to the July 1, 2007
balance of retained earnings.
Severance and Exit Costs
We recognize liabilities for severance and exit costs based upon the nature of the liability incurred. For
involuntary separation programs that are conducted according to the guidelines of our written involuntary
separation plan, we record the liability when it is probable and reasonably estimable in accordance with
SFAS No. 112, Employers’ Accounting for Postemployment Benefits. For involuntary separation
programs that are conducted according to the provisions of collective bargaining agreements or statutes,
we record the liability when it is probable and reasonably estimable in accordance with SFAS No. 88,
Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for