Hormel Foods 2015 Annual Report Download - page 44

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traded. The fair values of the Company’s private equity invest-
ments are determined by discounting the estimated future
cash fl ows of each entity. These cash fl ow estimates include
assumptions on growth rates and future currency exchange
rates (Level 3). Excluding charges related to the exit from
international joint venture businesses in fi scal year 2015, there
were no other charges on any of the Company’s equity invest-
ments in fi scal years 2015, 2014, or 2013.
See additional discussion regarding the Company’s equity
method investments in Note I.
Revenue Recognition: The Company recognizes sales when
title passes upon delivery of its products to customers, net of
applicable provisions for discounts, returns, and allowances.
Products are delivered upon receipt of customer purchase
orders with acceptable terms, including price and collectabil-
ity that is reasonably assured.
The Company offers various sales incentives to customers
and consumers. Incentives that are offered off-invoice include
prompt pay allowances, will call allowances, spoilage allow-
ances, and temporary price reductions. These incentives are
recognized as reductions of revenue at the time title passes.
Coupons are used as an incentive for consumers to purchase
various products. The coupons reduce revenues at the time
they are offered, based on estimated redemption rates.
Promotional contracts are performed by customers to pro-
mote the Company’s products to consumers. These incentives
reduce revenues at the time of performance through direct
payments and accrued promotional funds. Accrued promo-
tional funds are unpaid liabilities for promotional contracts
in process or completed at the end of a quarter or fi scal year.
Promotional contract accruals are based on a review of the
unpaid outstanding contracts on which performance has taken
place. Estimates used to determine the revenue reduction
include the level of customer performance and the historical
spend rate versus contracted rates.
Allowance for Doubtful Accounts: The Company estimates
the allowance for doubtful accounts based on a combination of
factors, including the age of its accounts receivable balances,
customer history, collection experience, and current market
factors. Additionally, a specifi c reserve may be established if
the Company becomes aware of a customer’s inability to meet
its fi nancial obligations.
Advertising Expenses: Advertising costs are expensed when
incurred. Advertising expenses include all media advertising
but exclude the costs associated with samples, demonstra-
tions, and market research. Advertising costs for fi scal years
2015, 2014, and 2013 were $145.3 million, $114.4 million, and
$89.9 million, respectively.
Shipping and Handling Costs: The Company’s shipping and
handling expenses are included in cost of products sold.
Research and Development Expenses: Research and devel-
opment costs are expensed as incurred and are included in
selling, general and administrative expenses. Research and
development expenses incurred for fi scal years 2015, 2014,
and 2013 were $32.0 million, $29.9 million, and $29.9 million,
respectively.
receive benefi ts under those plans. For plans with only retiree
participants, net gains or losses in excess of the corridor
are amortized over the average remaining life of the retirees
receiving benefi ts under those plans.
Contingent Liabilities: The Company may be subject to
investigations, legal proceedings, or claims related to the
on-going operation of its business, including claims both by
and against the Company. Such proceedings typically involve
claims related to product liability, contract disputes, wage and
hour laws, employment practices, or other actions brought
by employees, consumers, competitors, or suppliers. The
Company establishes accruals for its potential exposure, as
appropriate, for claims against the Company when losses
become probable and reasonably estimable. Where the
Company is able to reasonably estimate a range of potential
losses, the Company records the amount within that range
that constitutes the Company’s best estimate. The Company
also discloses the nature of and range of loss for claims
against the Company when losses are reasonably possible and
material.
Foreign Currency Translation: Assets and liabilities denom-
inated in foreign currency are translated at the current
exchange rate as of the statement of fi nancial position date,
and amounts in the statement of operations are translated at
the average monthly exchange rate. Translation adjustments
resulting from fl uctuations in exchange rates are recorded
as a component of accumulated other comprehensive loss in
shareholders’ investment.
When calculating foreign currency translation, the Company
deemed its foreign investments to be permanent in nature
and has not provided for taxes on currency translation adjust-
ments arising from converting the investment in a foreign
currency to U.S. dollars.
Derivatives and Hedging Activity: The Company uses com-
modity and currency positions to manage its exposure to price
fl uctuations in those markets. The contracts are recorded
at fair value on the Consolidated Statements of Financial
Position within other current assets or accounts payable.
Additional information on hedging activities is presented in
Note H.
Equity Method Investments: The Company has a number of
investments in joint ventures where its voting interests are in
excess of 20 percent but not greater than 50 percent and for
which there are no other indicators of control. The Company
accounts for such investments under the equity method of
accounting, and its underlying share of each investee’s equity is
reported in the Consolidated Statements of Financial Position
as part of investments in and receivables from affi liates.
The Company regularly monitors and evaluates the fair value
of our equity investments. If events and circumstances indicate
that a decline in the fair value of these assets has occurred and
is other than temporary, the Company will record a charge in
equity in earnings of affi liates in the Consolidated Statements
of Operations. The Company’s equity investments do not have
a readily determinable fair value as none of them are publicly