Plantronics 2006 Annual Report Download - page 84

Allowance for Doubtful Accounts
Plantronics maintains allowances for doubtful accounts for estimated losses resulting from the inability of
its customers to make required payments. Plantronics regularly performs credit evaluations of its
customers’ financial condition and consider factors such as historical experience, credit quality, age of the
accounts receivable balances, and geographic or country-specific risks and economic conditions that may
affect a customers’ ability to pay. The allowance for doubtful accounts is reviewed monthly and adjusted if
necessary based on management’s assessments of customers’ ability to pay. If the financial condition of
customers should deteriorate or if actual defaults are higher than historical experience, additional
allowances may be required, which could have an adverse impact on operating expenses.
Inventory and Excessive and Obsolete Inventory
Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which
approximates actual cost, on a first-in, first-out basis.
Plantronics accounts for abnormal amounts of idle facility expense, excessive spoilage, double freight, and
re-handling costs as current-period charges. Additionally, it allocates fixed production overheads to the
costs of conversion based on the normal capacity of the production facilities. All shipping and handling
costs incurred in connection with the sale of products are included in the cost of revenues.
Management writes down inventory for excess and obsolete inventories. Write-downs are determined by
reviewing the Company’s demand forecast and by determining what inventory, if any, is not saleable. The
Company’s demand forecast projects future shipments using historical rates and takes into account
market conditions, inventory on hand, purchase commitments, product development plans and product
life expectancy, inventory on consignment, and other competitive factors. If the Company’s demand
forecast is greater than actual demand, and management fails to reduce manufacturing accordingly, it
could be required to write down additional inventory, which would have a negative impact on the
Company’s gross profit.
At the point of inventory write-down, a new, lower-cost basis for that inventory is established and
subsequent changes in facts and circumstances do not result in the restoration or increase in that newly
established cost basis.
Product Warranty Obligations
Management provides for product warranties in accordance with the underlying contractual terms given
to the customer or end user of the product. The contractual terms may vary depending upon the
geographic region in which the customer is located, the brand and type of product sold, and other
conditions, which affect or limit the customers’ rights to return product under warranty. Where specific
warranty return rights are given to customers, management accrues for the estimated cost of those
warranties at the time revenue is recognized. Generally, warranties start at the delivery date and continue
for one or two years, depending on the type and brand, and the location in which the product was
purchased. Where specific warranty return rights are not given to the customer but where the customers
are granted limited rights of return or discounts in lieu of warranty, management records these rights of
return or discounts as adjustments to revenue. In certain circumstances, the Company may sell product
without warranty, and accordingly, no charge is taken for warranty. Factors that affect the warranty
obligation include sales terms, which obligate the Company to provide warranty, product failure rates,
estimated return rates, material usage, and service delivery costs incurred in correcting product failures.
Management assesses the adequacy of the recorded warranty obligation quarterly and makes adjustments
to the obligation based on the actual experience and changes in estimates of future return rates. (See
Note 19).
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