Invacare 2008 Annual Report Download - page 56

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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 Warranty Costs in the Notes to the
Condensed Consolidated Financial Statements included in this report for a reconciliation of the changes in the
warranty accrual.
Accounting for Stock-Based Compensation
The company accounts for share based compensation under the provisions of Statement of Financial
Accounting Standard No. 123 (Revised 2004), Share Based Payment (“SFAS 123R”).The company has not
made any modifications to the terms of any previously granted options and no changes have been made regarding
the valuation methodologies or assumptions used to determine the fair value of options granted since 2005 and
the company continues to use a Black-Scholes valuation model. As of December 31, 2008, there was
$12,599,000 of total unrecognized compensation cost from stock-based compensation arrangements granted
under the plans, which is related to non-vested shares, and includes $4,505,000 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.
Income Taxes
As part of the process of preparing its financial statements, the company is required to estimate income
taxes in various jurisdictions. The process requires estimating the company’s current tax exposure, including
assessing the risks associated with tax audits, as well as estimating temporary differences due to the different
treatment of items for tax and accounting policies. The temporary differences are reported as deferred tax assets
and or liabilities. The company also must estimate the likelihood that its deferred tax assets will be recovered
from future taxable income and whether or not valuation allowances should be established. In the event that
actual results differ from its estimates, the company’s provision for income taxes could be materially impacted.
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