Harman Kardon 2011 Annual Report Download - page 47

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 in our Consolidated Balance Sheets in Other current
assets and Other assets, once an agreement is signed. We believe that the terms of our supply contracts and our
established relationships with these automobile manufacturers reasonably assure that we will collect the
reimbursable portions of these contracts.
Accrued Warranties
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 as warranty expense in our Consolidated
Statement of Operations. We take these factors into consideration when assessing the adequacy of our warranty
provision for periods still open to claim. Refer to Note 6 – Accrued Warranties in the Notes to the Consolidated
Financial Statements for more information.
Income Taxes and Tax Valuation Allowances
We record the estimated future tax effects of temporary differences between the tax basis of assets and
liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit
carryforwards. We evaluate all available positive and negative evidence in each tax jurisdiction regarding the
recoverability of any asset recorded in our Consolidated Balance Sheets and provide valuation allowances to
reduce our deferred tax assets to an amount we believe is more likely than not to be realized. We regularly
review our deferred tax assets for recoverability considering historical profitability, our ability to project future
taxable income, the expected timing of the reversals of existing temporary differences and tax planning
strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future
taxable income within the defined lives of such assets, we could be required to increase our valuation allowance
against all or a significant portion of our deferred tax assets. This increase in valuation allowance could result in
substantial increases in our effective tax rate and could have a material adverse impact on our operating results.
Conversely, if and when our operations in some jurisdictions become sufficiently profitable before our current
estimates, we would be required to reduce all or a portion of our current valuation allowance and such reversal
would result in an increase in our earnings in such period. Adjustments to our valuation allowance from
continuing operations, through charges to income tax expense were $0.2, $4.8 million and $9.7 million for the
years ending June 30, 2011, 2010 and 2009, respectively.
The calculation of our deferred tax liabilities involves evaluating uncertainties in the application of complex
tax regulations. We recognize liabilities for tax audit issues in the U.S. and other tax jurisdictions based on our
estimate of whether and the extent to which additional taxes will be due. If payment of these amounts ultimately
proves to be unnecessary, the reversal of the liabilities would result in additional tax benefits recognized in the
period in which we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be
less than the ultimate assessment, a further charge to expense would result. We recognize interest and penalties
related to income tax matters in income tax expense. Refer to Note 13 – Income Taxes in the Notes to the
Consolidated Financial Statements for more information.
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