Invacare 2007 Annual Report Download - page 54

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layers of external insurance coverage insuring up to $75,000,000 in annual aggregate losses arising from
individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of
the company’s per country foreign liability limits, as applicable. There can be no assurance that Invacare’s
current insurance levels will continue to be adequate or available at affordable rates.
Product liability reserves are recorded for individual claims based upon historical experience, industry
expertise and indications from the third-party actuary. Additional reserves, in excess of the specific individual
case reserves, are provided for incurred but not reported claims based upon third-party actuarial valuations at the
time such valuations are conducted. Historical claims experience and other assumptions are taken into
consideration by the third-party actuary to estimate the ultimate reserves. For example, the actuarial analysis
assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by
geographic area and nature of operations for ongoing operations is expected to be very similar to historical
operations with no dramatic changes and that the government indices used to trend losses and exposures are
appropriate. Estimates made are adjusted on a regular basis and can be impacted by actual loss award settlements
on claims. While actuarial analysis is used to help determine adequate reserves, the company accepts
responsibility for the determination and recording of adequate reserves in accordance with accepted loss
reserving standards and practices.
Warranty
Generally, the company’s products are covered from the date of sale to the customer by warranties against
defects in material and workmanship for various periods depending on the product. Certain components carry a
lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual
experience. The company continuously assesses the adequacy of its product warranty accrual and makes
adjustments as needed. Historical analysis is primarily used to determine the company’s warranty reserves.
Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other
events, such as a product recall, which could warrant additional warranty reserve provision. No material
adjustments to warranty reserves were necessary in the current year. See Current Liabilities in the Notes to the
Consolidated Financial Statements included in this report for a reconciliation of the changes in the warranty
accrual.
Accounting for Stock-Based Compensation
Effective January 1, 2006, the company adopted Statement of Financial Accounting Standard No. 123
(Revised 2004), Share Based Payment (“SFAS 123R”) using the modified prospective application method.
Under the modified prospective method, compensation cost was recognized for: (1) all stock-based payments
granted subsequent to January 1, 2006 based upon the grant-date fair value calculated in accordance with
SFAS 123R, and (2) all stock-based payments granted prior to, but not vested as of, January 1, 2006 based upon
grant-date fair value previously calculated for previously presented pro forma footnote disclosures in accordance
with the original provisions of SFAS No. 123, Accounting for Stock Based Compensation.
Upon adoption of SFAS 123R, the company did not make any other modifications to the terms of any
previously granted options. However, the terms of new awards granted have been modified so that the vesting
periods are deemed to be substantive for those who may be retiree eligible. No changes were made regarding the
valuation methodologies or assumptions used to determine the fair value of options granted and the company
continues to use a Black-Scholes valuation model. As of December 31, 2007, there was $9,570,000 of total
unrecognized compensation cost from stock-based compensation arrangements granted under the plans, which is
related to non-vested shares, and includes $3,904,000 related to restricted stock awards. The company expects the
compensation expense to be recognized over a weighted-average period of approximately two years.
The majority of the options awarded have been granted at exercise prices equal to the market value of the
underlying stock on the date of grant. Restricted stock awards granted without cost to the recipients are expensed
on a straight-line basis over the vesting periods.
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