Plantronics 2008 Annual Report Download - page 52

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inventory, if any, is not saleable. Our 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 our demand forecast is greater than actual demand, and fail to reduce our supply chain
accordingly, we could be required to write down additional inventory, which would have a negative impact on our 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, we may sell product without warranty, and accordingly, no charge is
taken for warranty. Factors that affect the warranty obligation include sales terms, which obligate us 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 actual
experience and changes in estimated future return rates. If our estimates are less than the actual costs of providing warranty related
services, we could be required to take additional warranty reserves, which would have a negative impact on our gross profit.
Goodwill and Intangibles
As a result of past acquisitions, the Company has recorded goodwill and intangible assets on the consolidated balance sheets. In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we classify intangible assets into three categories: (1)
goodwill; (2) intangible assets with indefinite lives not subject to amortization; and (3) intangible assets with definite lives subject to
amortization.
Goodwill and intangible assets with indefinite lives are not amortized. Management performs a review at least annually, or more
frequently if indicators of impairment exist, to determine if the carrying values of goodwill and indefinite lived intangible assets are
impaired.
Goodwill has been measured as the excess of the cost of acquisition over the amount assigned to tangible and identifiable intangible
assets acquired less liabilities assumed. The identification and measurement of goodwill impairment involves the estimation of fair
value at the Company’s reporting unit level. Such impairment tests for goodwill include comparing the fair value of a reporting unit
with its carrying value, including goodwill. The estimates of fair values of reporting units are based on the best information available
as of the date of the assessment, which primarily incorporate management assumptions about expected future cash flows, discount
rates, overall market growth and our percentage of that market and growth rates in terminal values, estimated costs, and other factors,
which utilize historical data, internal estimates, and in some cases outside data. If the carrying value of the reporting unit exceeds
management’s estimate of fair value, goodwill may become impaired, and the Company may be required to take an impairment
charge, which would negatively impact our operating results. (See Note 7)
In performing the impairment test for intangible assets with indefinite useful lives, the Company compares the fair value of intangible
assets with indefinite useful lives to its carrying value. The fair value measurement of purchased intangible assets with indefinite lives
involves the estimation of the fair value which is based on management assumptions about expected future cash flows, discount rates,
growth rates, estimated costs and other factors which utilize historical data, internal estimates, and in some cases outside data. If the
carrying value of the indefinite useful life intangible asset exceeds management’s estimate of fair value, goodwill may become
impaired, and the Company may be required to take an impairment charge which would negatively impact its operating results.
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the
assets, which range from five to ten years. Long-lived assets, including intangible assets, are reviewed for impairment in accordance
with SFAS No. 144, “Impairment of Long-Lived Assets,” (“SFAS No. 144”) whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Such conditions may include an economic downturn or a change in
the assessment of future operations. Determination of recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that
management expects to hold and use is based on the amount that the carrying value of the asset exceeds its fair value. Long-lived