Invacare 2007 Annual Report Download - page 77

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INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting Policies—Continued
In December 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS 141R), which changes
the accounting for business acquisitions. SFAS 141(R) requires the acquiring entity in a business combination to
recognize all the assets acquired and liabilities assumed in the transaction and establishes principles and
requirements as to how an acquirer should recognize and measure in its financial statements the assets acquired,
liabilities assumed, any non-controlling interest and goodwill acquired. SFAS 141(R) also requires expanded
disclosure regarding the nature and financial effects of a business combination. SFAS 141(R) is effective for the
company beginning January 1, 2009 and the company is currently evaluating the future impacts and disclosures
of this standard.
On September 5, 2007, the FASB exposed for comment FASB Staff Position APB 14-a (FSP APB 14-a) to
provide clarification of the accounting for convertible debt that can be settled in cash upon conversion. The
FASB believes this clarification is needed because the current accounting being applied for convertible debt does
not fully reflect the true economic impact on the issuer since the conversion option is not captured as a borrowing
cost and its full dilutive effect is not included in earnings per share. The proposed FSP would require separate
accounting for the liability and equity components of the convertible debt in a manner that would reflect
Invacare’s nonconvertible debt borrowing rate. The company would be required to bifurcate a component of its
convertible debt as a component of stockholders’ equity and accrete the resulting debt discount as interest
expense. The comment period regarding the exposure draft ended October 15, 2007 and the exposure draft is
currently being redeliberated by the FASB. Should the proposed FSP become effective as drafted, the change
may materially impact the company’s interest expense and earnings per share. The most recent proposed
effective date was January 1, 2008 with retrospective application required for all periods presented and no
grandfathering for existing instruments.
Receivables
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future.
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
reimbursement programs such as Medicare and Medicaid. In addition, the company has 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. The estimated allowance for uncollectible amounts
($39,135,000 in 2007 and $35,591,000 in 2006) is based primarily on management’s evaluation of the financial
condition of the customer. The company’s allowance for uncollectible accounts contemplates the increased
collectibility risk 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 its 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, including product line consolidations
and introduction of simplified pricing. In addition, the company has also implementing tighter credit policies
with many of these accounts.
Until February 2007, the company utilized a 364-day $100 million accounts receivable securitization facility
which was entered into on September 30, 2005. The Receivables Purchase Agreement (the “Receivables
Agreement”), provided for, among other things, the transfer from time to time by Invacare and certain of its
subsidiaries of ownership interests of certain domestic accounts receivable on a revolving basis to the bank
conduit, an asset-backed issuer of commercial paper, and/or the financial institutions named in the Receivables
Agreement. Pursuant to the Receivables Agreement, the company and certain of its subsidiaries from time to
time could transfer accounts receivable to Invacare Receivables Corporation (IRC), a special purpose entity and
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