Logitech 2005 Annual Report Download - page 72

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Logitech for future growth by improving operational and financial processes to realize cost structure
improvements and to more effectively manage increased marketplace and business complexity. Also,
construction is nearly complete on a new and larger production facility in Suzhou, China, expected to be fully
operational by summer 2005. The expanded manufacturing facility will provide increased production capacity
and greater flexibility in fulfilling product demand.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with generally accepted
accounting principles in the United States of America (“U.S. GAAP”) and in compliance with relevant Swiss law
requires the Company to make judgments, estimates and assumptions that affect reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those estimates.
Logitech considers an accounting estimate critical if: (i) it requires management to make judgments and
estimates about matters that are inherently uncertain; and (ii) is important to an understanding of the Company’s
financial condition and operating results.
Management has discussed the development, selection and disclosure of these critical accounting estimates
with the Audit Committee of the Board of Directors. The Company believes the following accounting estimates
are most critical to its business operations and to an understanding of its financial condition and results of
operations, and affect its more significant judgments and estimates used in the preparation of its consolidated
financial statements. They should be read in conjunction with the Company’s consolidated financial statements.
Customer Programs
The Company records accruals for customer programs and incentive offerings, including certain rights of return,
price protection, consumer rebates, volume-based incentives and other customer marketing programs. The estimated
cost of these programs is accrued in the period the Company has sold the product or committed to the program as a
reduction to revenue or as an operating expense, depending on whether Logitech receives an identifiable benefit from
the customer and can reasonably estimate the fair value of that benefit. Significant management judgments and
estimates must be used to determine the cost of these programs in any accounting period.
The Company grants limited rights of return for certain products. Estimates of expected future product
returns are based on analyses of historical returns, inventories owned by and located at distributors and retailers,
and current customer demand. Return rates are influenced by the location and timing of the sale, product sell-
through, product quality issues and sales levels; and can fluctuate quarter over quarter. Distributor and retail
inventory levels fluctuate depending on product levels purchased and actual sell-through. Customer demand
varies depending on market acceptance and competitive pressures, new product introductions, and product
lifecycle status.
The Company has agreements with most of its retail customers that contain terms allowing price protection
credits to be issued in the event of a subsequent price reduction. The Company’s decision to effect price
reductions is influenced by channel inventory levels, product lifecycle stage, market acceptance and competitive
environment, and new product introductions. Credits are issued for units that customers have on hand at the date
of the price reduction. Upon approval of a price protection program, reserves for the estimated amounts to be
reimbursed to qualifying customers are established. Reserves are estimated based on analyses of qualified
inventories on hand with distributors and retailers.
Additionally, certain incentive programs, including consumer rebates, require management to estimate the
number of customers who will actually redeem the incentive based on historical experience and the specific
terms and conditions of particular programs. If a greater than estimated number of customers redeem such
incentives, the Company would be required to record additional reductions to revenue.
34