Nautilus 2006 Annual Report Download - page 42

Table of Contents
Foreign Currency Translations and Transactions – Accounts of the Company’s foreign operations are measured using the local
currency as the functional currency. These accounts are then translated into U.S. dollars using the current rate method with translation gains
and losses accumulated as the comprehensive income component of stockholders’ equity, except for gains or losses from transactions with the
Company’s international subsidiaries which are recorded as part of other income/expense in the consolidated statements of income.
Fair Value of Financial Instruments – The carrying amounts of the Company’s cash and cash equivalents, trade receivables, note
receivable, trade payables, accrued liabilities, short-term borrowings, and customer deposits approximate their estimated fair values due to the
short-term maturities of these financial instruments. Management does not expect the fair value of the Company’s long-term debt to materially
differ from its carrying value.
Guarantees – At times, the Company arranges for leases or other financing sources to enable sales of its commercial fitness equipment.
While most of these financing arrangements are without recourse, in certain cases the Company provides a guarantee or other recourse
provisions to an independent finance company for either all or a portion of the lease payments in order to facilitate the sale. In such situations,
the Company ensures that the transaction between the independent leasing company and the commercial customer represents a sales-
type lease.
The Company accounts for such agreements in accordance with Financial Accounting Standard Board (“FASB”) Interpretation (“FIN”)
No. 45,
Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others and therefore
records a liability and a corresponding reduction of revenue for the estimated fair value of the guarantees. Revenue is recognized over the life
of the lease obligation unless a loss is actually incurred related to such guarantee. The Company monitors the payment status of the lessee
under these arrangements and provides a reserve in accordance with SFAS No. 5, Accounting for Contingencies , in situations when collection
of the lease payments is not probable.
Generally, if the Company is required to fulfill its obligations under the guarantee, it has the right to repossess the products from the
commercial customer. It is not practical to estimate the amount of proceeds that would be generated from the sale of these assets in such
situations.
Share-Based Compensation – Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), Share-
Based Payment
(“SFAS 123(R)”) for its share-based compensation plan. SFAS 123(R) requires companies to recognize in the statement of
operations the grant-date fair value of stock awards issued to employees and directors. The Company adopted SFAS 123(R) using the modified
prospective transition method. In accordance with the modified prospective transition method, the Company’
s consolidated financial statements
for prior periods have not been restated to reflect the impact of SFAS 123(R). Therefore, the results for fiscal 2006 are not directly comparable
to prior years. The Company also adopted FASB Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax
Effects of Share
-Based Payment Awards (“FSP 123(R)-3”). Under FSP 123(R)-3, the Company elected not to use the short-cut method for
determining the historical pool of windfall tax benefits for purposes of determining whether an excess tax benefit has been realized.
The Company previously accounted for the plan under the recognition and measurement principles of Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations and disclosure requirements
established by SFAS 123, Accounting for Stock-Based Compensation , and SFAS No. 148, Accounting for Stock-Based Compensation —
Transition and Disclosure . In March 2005, the Securities and Exchange Commission (the “SEC”) issued SAB No. 107, Share-Based Payment
(“SAB 107”), relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
Under APB 25, no expense was recorded in the income statement for the Company’s equity awards granted at fair market value. The pro-
forma effect on income for equity awards was instead disclosed in a footnote to the financial statements. Expense was recorded in the income
statement for equity awards granted below fair market value on the date of grant.
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