Invacare 2007 Annual Report Download - page 72

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting Policies—Continued
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the
carrying amount may not be recoverable. The asset would be considered impaired when the future net
undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be
recognized based on the amount by which the carrying value of the asset exceeds its fair value.
Goodwill and Other Intangibles: In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
(“SFAS No. 142”) goodwill is subject to annual impairment testing. For purposes of the impairment test, the fair
value of each reporting unit is estimated by forecasting cash flows and discounting those cash flows using
appropriate discount rates. The fair values are then compared to the carrying value of the net assets of each
reporting unit. No impairments were recognized in 2007. As a result of reduced profitability in the NA/HME
operating segment and uncertainty associated with future market conditions, in 2006 the company recorded
impairment charges related to goodwill and an intangible asset in this segment of $294,656,000 and $160,000,
respectively, in addition, an impairment charge of $5,601,000 was recorded related to the intangible asset
recorded associated with NeuroControl, which is included in Other in the segment disclosure, at December 31,
2006.
Accrued Warranty Cost: Generally, the company’s products are covered by warranties against defects in
material and workmanship for various periods depending on the product from the date of sale to the customer.
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 for a reconciliation of the changes in the warranty accrual.
Product Liability Cost: The company’s captive insurance company, Invatection Insurance Co., currently has
a policy year that runs from September 1 to August 31 and insures annual policy losses of $10,000,000 per
occurrence and $13,000,000 in the aggregate of the company’s North American product liability exposure. The
company also has additional 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 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.
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 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.
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