Invacare 2006 Annual Report Download - page 68

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Accounting Policies — Continued
discounts based on contract level for specific classes of customers. Volume discounts and rebates are given based on
large purchases and the achievement of certain sales volumes. Product returns are accounted for as a reduction to
reported sales with estimates recorded for anticipated returns at the time of sale. The company does not sell any
goods on consignment.
Distributed products sold by the company are accounted for in accordance with EITF No. 99-19 Reporting
Revenue Gross as a Principal versus Net as an Agent. The company records distributed product sales gross as a
principal since the company takes title to the products and has the risks of loss for collections, delivery and returns.
Product sales that give rise to installment receivables are recorded at the time of sale when the risks and
rewards of ownership are transferred. In December 2000, the company entered into an agreement with DLL, a third
party financing company, to provide the majority of future lease financing to Invacare customers. As such, interest
income is recognized based on the terms of the installment agreements. Installment accounts are monitored and if a
customer defaults on payments, interest income is no longer recognized. All installment accounts are accounted for
using the same methodology, regardless of duration of the installment agreements.
Research and Development: Research and development costs are expensed as incurred and included in cost
of products sold. The company’s annual expenditures for product development and engineering were approximately
$22,146,000, $23,247,000, and $21,638,000 for 2006, 2005, and 2004, respectively.
Advertising: Advertising costs are expensed as incurred and included in selling, general and administrative
expenses. The company has a co-op advertising program in which the company reimburses customers up to 50% of
their costs of qualifying advertising expenditures. Invacare product, brand logos and corporate spokesperson,
Arnold Palmer, must appear in all advertising. Invacare requires customers to submit proof of advertising with their
claims for reimbursement. The company’s cost of the program is included in SG&A expense in the consolidated
statement of operations at the time the liability is estimated. Reimbursement is made on an annual basis and within
3 months of submission and approval of the documentation. The company receives monthly reporting from those in
the program of their qualified advertising dollars spent and accrues based upon information received. Advertising
expenses amounted to $24,214,000, $26,621,000 and $24,999,000 for 2006, 2005 and 2004, respectively, the
majority of which is incurred for advertising in the United States.
Stock-Based Compensation Plans: Prior to the company’s adoption of Statement of Financial Accounting
Standard No. 123 (Revised 2004), Share Based Payment (“SFAS 123R”), the company accounted for options under
its stock-based compensation plans using the intrinsic value method proscribed in Accounting Principles Board
Opinion (APBO) No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Only compensation
cost related to restricted stock awards granted without cost was reflected in net earnings, as all other options
awarded were granted at exercise prices equal to the market value of the underlying stock on the date of grant.
Effective January 1, 2006, the company adopted SFAS No. 123R using the modified prospective application
method. Under the modified prospective method, compensation cost was recognized for the twelve months ended
December 31, 2006 for: 1) all stock-based payments granted subsequent to January 1, 2006 based upon the grant-
date fair value calculated in accordance with SFAS No. 123R, and 2) all stock-based payments granted prior to, but
not vested as of, January 1, 2006 based upon grant-date fair value as calculated for previously presented pro forma
footnote disclosures in accordance with the original provisions of SFAS No. 123, Accounting for Stock Based
Compensation. The amounts of stock-based compensation expense recognized were as follows (in thousands):
2006 2005 2004
Stock-based compensation expense recognized as part of selling, general
and administrative expense .................................. $1,587 $881 $812
FS-9
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)