Invacare 2006 Annual Report Download - page 91

liability as it relates to the limited recourse obligation. As such, the company has recorded a liability for this
guarantee obligation within accrued expenses. The company monitors the collections status of these contracts and
has provided amounts for estimated losses in its allowances for doubtful accounts in accordance with SFAS No. 5,
Accounting for Contingencies. Credit losses are provided for in the financial statements.
Substantially all of the company’s receivables are due from health care, medical equipment dealers and long
term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant
portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reim-
bursement programs such as Medicare and Medicaid. In addition, the company has also seen a significant shift in
reimbursement to customers from managed care entities. As a consequence, changes in these programs can have an
adverse impact on dealer liquidity and profitability. In addition, reimbursement guidelines in the home health care
industry have a substantial impact on the nature and type of equipment an end user can obtain as well as the timing
of reimbursement and, thus, affect the product mix, pricing and payment patterns of the company’s customers.
Fair Values of Financial Instruments
The company in estimating its fair value disclosures for financial instruments used the following methods and
assumptions:
Cash, cash equivalents and marketable securities: The carrying amount reported in the balance sheet for
cash, cash equivalents and marketable securities approximates its fair value.
Installment receivables: The carrying amount reported in the balance sheet for installment receivables
approximates its fair value. The interest rates associated with these receivables have not varied significantly since
inception. Management believes that after consideration of the credit risk, the net book value of the installment
receivables approximates market value.
Long-term debt: Fair values for the company’s senior notes are estimated using discounted cash flow
analyses, based on the company’s current incremental borrowing rate for similar borrowing arrangements.
Interest Rate Swaps: The company is a party to interest rate swap agreements, which are entered into, in the
normal course of business to reduce exposure to fluctuations in interest rates. The agreements are with major
financial institutions, which are expected to fully perform under the terms of the agreements thereby mitigating the
credit risk from the transactions. The agreements are contracts to exchange fixed rate payments for floating rate
payments over the life of the agreements without the exchange of the underlying notional amounts. The notional
amounts of such agreements are used to measure interest to be paid or received and do not represent the amount of
exposure to credit loss. The amounts to be paid or received under the interest rate swap agreements are accrued
consistent with the terms of the agreements and market interest rates. Fair value for the company’s interest rate
swaps are based on independent pricing models.
Other investments: The company has made other investments in limited partnerships and non-marketable
equity securities, which are accounted for using the cost method, adjusted for any estimated declines in value. These
investments were acquired in private placements and there are no quoted market prices or stated rates of return.
FS-32
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentration of Credit Risk — Continued