Invacare 2013 Annual Report Download - page 63

I-57
As a result of the Company's 2011 intangible impairment review, the Company recognized intangible write-down charges
of $1,761,000 comprised of: customer list impairment of $625,000 in the IPG segment, customer list impairment of $508,000 in
the North America/HME segment, indefinite-lived trademark impairment of $427,000 in the European segment and an intellectual
property impairment of $201,000 in the Asia/Pacific segment. The after-tax and pre-tax impairment amounts were the same for
each of the above impairments except for the indefinite-lived trademark impairment in the European segment, which was $320,000
after-tax.
The fair value of the customer lists were calculated using an excess earnings method, using a discounted cash flow model.
Estimated cash flow returns to the customer relationship were reduced by the cash flows required to satisfy the return requirements
of each of the assets employed with the residual cash flow then discounted to value the customer relationship. The fair value of
the trademark and developed technology was calculated using a relief from royalty payment methodology which requires applying
an estimated market royalty rate to forecasted net sales and discounting the resulting cash flows to determine fair value. The
intellectual property intangible asset was impaired as the intellectual property was determined to be no longer viable and is no
longer being used.
Product Liability
The Company is self-insured in North America for product liability exposures through its captive insurance company,
Invatection Insurance Company, which currently has a policy year that runs from September 1 to August 31 and insures annual
policy losses up to $10,000,000 per occurrence and $13,000,000 in the aggregate. The Company also has additional layers of
external insurance coverage insuring up to $75,000,000 in aggregate losses per policy year 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 other
indicators. 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 Company in estimating 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 awards and settlements on claims. While actuarial analysis is used to help determine adequate reserves,
the Company is responsible 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 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. See Current Liabilities
in the Notes to the Consolidated Financial Statements 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 Compensation—Stock Compensation, ASC
718. 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 and the Company
continues to use a Black-Scholes valuation model. As of December 31, 2013, there was $11,975,000 of total unrecognized
compensation cost from stock-based compensation arrangements granted under the 2003 Performance Plan, which is related to
non-vested options and shares, and includes $3,705,000 related to restricted stock awards. The Company expects the compensation
expense to be recognized over a four-year period for a weighted-average period of approximately two years.
The substantial 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.