Invacare 2007 Annual Report Download - page 75

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INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting Policies—Continued
compensation plans and no other modifications were made to the awards that were accelerated. The exercise
prices of the accelerated options, all of which were underwater, were unchanged by the acceleration of the
vesting schedules. All of the company’s outstanding unvested options under our stock-based compensation plans
which were accelerated, had exercise prices ranging from $30.91 to $47.80 which were greater than our stock
market price of $30.75 as of the effective date of the acceleration.
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 income taxes has been provided for unremitted
earnings of foreign subsidiaries. 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 company is a party to interest rate swap agreements that qualify as cash flow hedges and effectively
convert floating-rate debt to fixed-rate debt, so the company can avoid the risk of changes in market interest
rates. Until the company refinanced its debt in February 2007, the company was also a party to interest rate swap
agreements 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 recognized net losses of
$394,000 and $696,000 in 2007 and 2006, respectively, and a net gain of $1,230,000 in 2005 related to its swap
agreements, 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 gain of $451,000 in 2007 and
net losses of $240,000 and $280,000 in 2006 and 2005, respectively, 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. The company has historically not recognized any
ineffectiveness related to forward contract cash flow hedges because the company generally limits it hedges to
60% of total forecasted transactions for a given entity’s exposure to currency rate changes and the transactions
hedged are recurring in nature.
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).
FS-11