Invacare 2006 Annual Report Download - page 70

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Accounting Policies — Continued
Income Taxes: The company uses the liability method in measuring the provision for income taxes and
recognizing deferred tax assets and liabilities on the balance sheet. The liability method requires that deferred
income taxes reflect the tax consequences of currently enacted rates for differences between the tax and financial
reporting bases of assets and liabilities. Undistributed earnings of the company’s foreign subsidiaries are considered
to be indefinitely reinvested and, accordingly, no provision for United States federal income taxes has been
provided. The amount of the unrecognized deferred tax liability for temporary differences related to investments in
foreign subsidiaries that are permanently reinvested is not practically determinable.
Derivative Instruments: The company recognizes its derivative instruments as assets or liabilities in the
consolidated balance sheet measured at fair value. A majority of the company’s derivative instruments are
designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized in current
earnings during the period of change. The derivatives designated as fair value hedges are perfectly effective; thus,
the entire gain or loss associated with the derivative instrument directly affects the value of the debt by increasing or
decreasing its carrying value.
The company was a party to interest rate swap agreements during the year that qualified as fair value hedges
and effectively converted fixed-rate debt to floating-rate debt, so the company could avoid paying higher than
market interest rates.
The company also had interest rate swap agreements, which expired in 2004, that qualified as cash flow hedges
and effectively converted $20,000,000 of its floating-rate debt to a fixed-rate basis, thus reducing the impact of
interest-rate changes on future interest expense. The company recognized a net loss of $696,000 in 2006 and net
gains of $1,230,000 and $4,577,000, respectively, related to its swap agreements in 2005 and 2004, which is
reflected in interest expense on the consolidated statement of operations.
To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory
purchases/sales over the next year, the company utilizes cash flow hedges to hedge portions of its forecasted
purchases/sales denominated in foreign currencies. The company recognized a net loss of $240,000 and $280,000 in
2006 and in 2005, respectively and a net gain in 2004 of $6,961,000, on foreign currency cash flow hedges. The
gains and losses are included in cost of products sold and selling, general and administrative expenses on the
consolidated statement of operations.
The company recognized no gain or loss related to hedge ineffectiveness or discontinued cash flow hedges. If it
is later determined that a hedged forecasted transaction is unlikely to occur, any gains or losses on the forward
contracts would be reclassified from other comprehensive income into earnings. The company does not expect this
to occur during the next twelve months.
Foreign Currency Translation: The functional currency of the company’s subsidiaries outside the United
States is the applicable local currency. The assets and liabilities of the company’s foreign subsidiaries are translated
into U.S. dollars at year-end exchange rates. Revenues and expenses are translated at weighted average exchange
rates. Gains and losses resulting from translation are included in accumulated other comprehensive earnings (loss).
Net Earnings Per Share: Basic earnings per share are computed based on the weighted-average number of
Common Shares and Class B Common Shares outstanding during the year. Diluted earnings per share are computed
based on the weighted-average number of Common Shares and Class B Common Shares outstanding plus the
effects of dilutive stock options outstanding during the year.
FS-11
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)