Plantronics 2007 Annual Report Download - page 73

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part ii
69A R 2 0 0 7
investments are sold at a loss or are considered to have an other than temporary decline in value, a charge to
operations is recorded. The specific identification method is used to determine the cost of securities disposed
of, with realized gains and losses reflected in interest and other income, net. (See Note 9)
Derivatives
The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair
value. The accounting for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the
gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on
the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow
hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of
accumulated other comprehensive income (loss) in stockholders’ equity and subsequently reclassified into
earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported
in earnings immediately. For derivative instruments that are not designated as accounting hedges under
Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for Derivative
Instruments and Hedging Activities”, changes in fair value are recognized in earnings in the period of
change. The Company does not hold or issue derivative financial instruments for speculative trading
purposes. Plantronics enters into derivatives only with counterparties that are among the largest U.S.
banks, ranked by assets, in order to minimize its credit risk. (See Note 14)
Allowance for Doubtful Accounts
The Company 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 considers 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 customer’s ability to pay. The allowance for doubtful accounts is reviewed and adjusted if necessary
based on management’s assessments. 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 Excess 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. 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, 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