Invacare 2007 Annual Report Download - page 52

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Revenue Recognition
Invacare’s revenues are recognized when products are shipped to unaffiliated customers. The SEC’s Staff
Accounting Bulletin (SAB) No. 101, “Revenue Recognition,” as updated by SAB No. 104, provides guidance on
the application of generally accepted accounting principles (GAAP) to selected revenue recognition issues. The
company has concluded that its revenue recognition policy is appropriate and in accordance with GAAP and
SAB No. 101. Shipping and handling costs are included in cost of goods sold.
Sales are only made to customers with whom the company believes collection is reasonably assured based
upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal
guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are
established for new customers after an evaluation of their credit report and/or other relevant financial
information. Existing credit lines are regularly reviewed and adjusted with consideration given to any
outstanding past due amounts.
The company offers discounts and rebates, which are accounted for as reductions to revenue in the period in
which the sale is recognized. Discounts offered include: cash discounts for prompt payment, base and trade
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 Emerging Issues Task
Force, or “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. The company utilizes 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.
Allowance for Uncollectible Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future.
Substantially all of our 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 reimbursement
programs such as Medicare and Medicaid. As a consequence, changes in these programs can have an adverse
impact on dealer liquidity and profitability. The estimated allowance for uncollectible amounts is based primarily
on management’s evaluation of the financial condition of the customer. In addition, as a result of the third party
financing arrangement, management monitors the collection status of these contracts in accordance with our
limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful
accounts. See Concentration of Credit Risk in the Notes to the Consolidated Financial Statements in this report.
In 2006, the company recorded an incremental accounts receivable reserve of $26,775,000 due to the
increased collectibility risk to the company resulting from changes in Medicare reimbursement regulations,
specifically changes to the qualification processes and reimbursement levels of power wheelchairs. The company
has reviewed the accounts receivables associated with many of the company’s customers that are most exposed
to these issues. The company is also working with certain of its customers in an effort to help them reduce costs
and improve their profitability. In addition, the company has also implemented tighter credit policies with many
of these accounts.
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