Nautilus 2013 Annual Report Download - page 23

costs are recorded as a component of cost of sales, based on historical warranty claim experience and available product quality data. If necessary,
we adjust our liability for specific warranty matters when they become known and are reasonably estimable. Our estimates of warranty expenses
are based on significant judgment, and the frequency and cost of warranty claims are subject to variation. Warranty expenses are affected by the
performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to the customer,
product failure rates and variances in expected repair costs.
Litigation and Loss Contingencies
From time to time, we may be involved in claims, lawsuits and other proceedings. Such matters involve uncertainty as to the eventual outcomes
and any losses or gains we may ultimately realize when one or more future events occur or fail to occur. We record expenses for litigation and
loss contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We estimate the
probability of such losses based on the advice of internal and external counsel, outcomes from similar litigation, status of the lawsuits (including
settlement initiatives), legislative developments and other factors.
Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of
the related loss contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these contingencies and, as
additional information becomes known, we may change our estimates accordingly.
Deferred Tax Assets
- Valuation Allowance
We account for income taxes based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.
Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the temporary differences are
expected to be included, as income or expense, in the applicable tax return. The effect of a change in tax rates on our deferred tax assets and
liabilities is recognized in the period of the enactment.
We have recorded a valuation allowance to reduce our Deferred Income Tax Assets to the amount we believe is more likely than not to be
realized. As we determined, based on reviewing all the positive and negative evidence, that it is more likely than not that the benefit from certain
Deferred Income Tax Assets will not be realized, we have a valuation allowance against net Deferred Income Tax Assets of $12.9 million
. If our
assumptions change and we determine we will be able to realize these Deferred Income Tax Assets, the tax benefits related to any reversal of the
valuation allowance will be accounted for in the period in which we make such determination. Likewise, should we determine that we would not
be able to realize our Deferred Income Tax Assets in the future, an adjustment to the valuation allowance to reserve for the Deferred Income Tax
Assets would increase expense in the period such determination was made.
For example, in the second quarter of 2013, we evaluated the potential realization of our Deferred Income Tax Assets, considering both positive
and negative evidence, including cumulative income or loss for the past three
years and forecasted taxable income. As a result of this evaluation
we concluded that, as of June 30, 2013, a majority of the existing valuation allowance on our domestic Deferred Income Tax Assets was no
longer required. As of December 31, 2013, we maintain the same position that the partial release of valuation allowance is still appropriate.
Accordingly, an income tax benefit of $38.9 million was recorded during 2013 related to the reduction of our existing valuation allowance.
Unrecognized Tax Benefits
Significant judgments are required in determining tax provisions and evaluating tax positions. Such judgments require us to interpret existing tax
law and other published guidance as applied to our circumstances. If our financial results or other relevant facts change, thereby impacting the
likelihood of realizing the tax benefit of an uncertain tax position, significant judgment would be applied in determining the effect of the change.
A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained based on the
technical merits of the position upon examination, including resolutions of any related appeals or litigation.
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