Harman Kardon 2011 Annual Report Download - page 71

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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.
Sales Discounts: We offer product discounts and sales incentives including prompt payment discounts,
volume incentive programs, rebates and dealer order incentives. We report revenues net of discounts and other
sales incentives.
Cost of Sales: Cost of sales includes material, labor and overhead for products manufactured by us and cost
of goods produced for us on a contract basis. Expenses incurred for manufacturing depreciation and engineering,
warehousing, shipping and handling, sales commissions, warranty and customer service are also included in cost
of sales.
Allowance for Doubtful Accounts: We reserve an estimated amount for accounts receivable that may not
be collected. Methodologies for estimating the allowance for doubtful accounts are primarily based on specific
identification of uncollectible accounts. Historical collection rates and customer credit worthiness are considered
in determining specific reserves. At June 30, 2011 and June 30, 2010, we had $7.0 million and $8.1 million,
respectively, reserved for possible uncollectible accounts receivable. As with many estimates, management must
make judgments about potential actions by third parties in establishing and evaluating our allowance for doubtful
accounts.
Automotive Supply Arrangements: We have arrangements with our Automotive customers to provide
products that meet predetermined technical specifications and delivery dates. In the event we do not satisfy the
performance obligations under these arrangements, we may be required to indemnify the customer. We accrue
for any loss that we expect to incur under these arrangements when the loss is probable and can be reasonably
estimated.
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 for
further information.
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