Plantronics 2009 Annual Report Download - page 63

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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
We provide 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, we accrue 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 customers but where the customers are
granted limited rights of return or discounts in lieu of warranty, we record 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. We assess the adequacy of the recorded
warranty obligation quarterly and make 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 record
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, in the fourth
quarter of each fiscal year, or more frequently if indicators of impairment exist, to determine if the carrying values of goodwill and
indefinite lived intangible assets are impaired. In the third quarter of fiscal 2009, in considering the effects of the current economic
environment we determined that sufficient indicators existed requiring us to perform an interim impairment review of our two
reporting segments, ACG and AEG.
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 our
estimate of fair value, goodwill may become impaired, and we may be required to record an impairment charge, which would
negatively impact our operating results.
The fair value of the ACG reporting unit was determined using an equal weighting of the income approach and the market comparable
approach. For the income approach, we made the following assumptions: the current economic downturn would continue through
fiscal 2010, followed by a recovery period in fiscal 2011 and 2012 and then growth in line with industry estimated revenues. Gross
margin trends were consistent with historical trends. A 3% growth factor was used to calculate the terminal value of our reporting
units after fiscal year 2017, consistent with the rate used in the prior year. The discount rate was adjusted from 13% used in the prior
year to 14% reflecting the current volatility of the stock prices of public companies within the consumer electronics industry. For the
market comparable approach, we reviewed comparable companies in the industry. Revenue multiples were determined for these
companies and an average multiple based on prior twelve months revenue of these companies of 0.5 was then applied to the unit
revenue. A 10% control premium was added to determine the value on the marketable controlling interest basis. Cash and short-term
investments were then added back to arrive at an indicated value on a marketable, controlling interest basis.