Harman Kardon 2011 Annual Report Download - page 45

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we report in our consolidated financial statements. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying
values of assets and liabilities. Actual results may differ from these estimates under different assumptions or
conditions. Our accounting policies are more fully described in Note 1 – Summary of Significant Accounting
Policies, in the Notes to the Consolidated Financial Statements located in Item 8 of Part II of this report.
However, we believe the following policies merit discussion due to their higher degree of judgment, estimation,
or complexity.
Revenue Recognition
Revenue is generally recognized at the time of product shipment or delivery, depending on when the
passage of title to goods transfers to unaffiliated customers and when all of the following have occurred: a firm
sales agreement is in place, pricing is fixed or determinable and collection is reasonably assured. Sales are
reported net of estimated returns, discounts, rebates and incentives. Substantially all of our revenue transactions
involve the delivery of a physical product. Royalty income, which is not material, is recorded when earned based
upon contract terms with licensees which provide for royalties.
We enter into incentive agreements with certain automotive customers which relate to a specific program
award. These incentives are generally based on fixed payments paid by us to the automotive manufacturer, and
are generally deferred, if certain criteria are met. The deferability criteria include the existence of legally
enforceable rights, management’s ability and intent to enforce the recoverability clauses and the ability to
generate future earnings from the agreement in excess of the deferred amounts. Capitalized amounts are
amortized, generally as a reduction to revenue, over the related program award term based on our estimate of
future volumes. Our estimates are reviewed regularly and the cumulative impact of a revision in estimates is
recorded in the period such revisions become probable and estimable.
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 collectability issues and percentages applied to
aged receivables based on historical experience. We must make judgments and estimates regarding accounts
receivable 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 collectability of accounts receivable have an impact on our consolidated financial statements.
Inventories, net
Inventories, net are stated at the lower of cost or market. Cost is determined principally by the first-in,
first-out method. We establish reserves for our inventory which require us to analyze the aging and forecasted
demand for our inventories, to forecast future product sales prices, pricing trends and margins, and to make
judgments and estimates regarding obsolete, damaged or excess inventory. Markdown percentages are
determined based on our estimate of future demand and selling prices for our products. Future sales prices are
determined based on current and forecasted market expectations, as well as terms that have been established for
future orders under automotive platform arrangements. Our inventory reserves primarily relate to our raw
materials as our finished goods are primarily produced to order. We calculate inventory reserves on raw materials
by reviewing the levels of raw materials on-hand and comparing this to estimates of historical consumption and
future demand in order to assess whether we have excess materials on-hand. If it is determined that excess
materials are in inventory, an appropriate inventory reserve is established. Inventory reserves on finished goods
are primarily determined through inventory turnover measures. Products showing low turnover rates are assigned
a percentage reserve based on future estimates of sales volumes and margins. We make adjustments to our
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