Invacare 2011 Annual Report Download - page 58

Distributed products sold by the company are accounted for in accordance with the revenue recognition
guidance in ASC 605-45-05.The company records distributed product sales gross as a principal since the
company takes title to the products and has the risks of loss for collections, delivery and returns.
Product sales that give rise to installment receivables are recorded at the time of sale when the risks and
rewards of ownership are transferred. Interest income is recognized on installment agreements in accordance
with the terms of the agreements. Installment accounts are monitored and if a customer defaults on payments,
interest income is no longer recognized. All installment accounts are accounted for using the same methodology,
regardless of duration of the installment agreements.
Allowance for Uncollectible Accounts Receivable
The estimated allowance for uncollectible amounts is based primarily on management’s evaluation of the
financial condition of the customer. In addition, as a result of the third party financing arrangement, management
monitors the collection status of these contracts in accordance with the company’s limited recourse obligations
and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishing
reserves for specific customers as needed.
The company continues to closely monitor the credit-worthiness of its customers and adhere to tight credit
policies. During the first quarter of 2011, the Centers for Medicare and Medicaid Services implemented the
single payment amounts for Round 1 of the National Competitive Bidding program in nine metropolitan
statistical areas (MSAs). The single payment amounts are used to determine the price that Medicare pays for
certain durable medical equipment, prosthetics, orthotics and supplies. The company believes the changes
announced could have a significant impact on the collectability of accounts receivable for those customers which
are in the MSA locations impacted and which have a portion of their revenues tied to Medicare
reimbursement. As a result, this is an additional risk factor which the company considers when assessing the
collectability of accounts receivable.
Invacare has an agreement with DLL, a third party financing company, to provide the majority of future
lease financing to Invacare’s North America customers. The DLL agreement provides for direct leasing between
DLL and the Invacare customer. The company retains a recourse obligation for events of default under the
contracts. The company monitors the collections status of these contracts and has provided amounts for estimated
losses in its allowances for doubtful accounts.
Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories are stated at the lower of cost or market with cost determined by the first-in, first-out
method. Inventories have been reduced by an allowance for excess and obsolete inventories. The estimated
allowance is based on management’s review of inventories on hand compared to estimated future usage and
sales. A provision for excess and obsolete inventory is recorded as needed based upon the discontinuation of
products, redesigning of existing products, new product introductions, market changes and safety issues. Both
raw materials and finished goods are reserved for on the balance sheet.
In general, Invacare reviews inventory turns as an indicator of obsolescence or slow moving product as well as
the impact of new product introductions. Depending on the situation, the company may partially or fully reserve for
the individual item. The company continues to increase its overseas sourcing efforts, increase its emphasis on the
development and introduction of new products, and decrease the cycle time to bring new product offerings to
market. These initiatives are sources of inventory obsolescence for both raw material and finished goods.
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