Sunbeam 2005 Annual Report Download - page 29

Management’s Discussion and Analysis of Financial Condition and
Results of Operations (cont’d)
Other than as discussed specifically above, these amounts are not required to be included in our
Consolidated Balance Sheets.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in
the United States of America, which require us to make judgments, estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. The following list of critical
accounting policies is not intended to be a comprehensive list of all our accounting policies. Our significant
accounting policies are more fully described in Note 1 – Significant Accounting Policies to Item 8. –
Financial Statements and Supplementary Data. The following represents a summary of our critical accounting
policies, defined as those policies that we believe are the most important to the portrayal of our financial
condition and results of operations, and/or require management’s significant judgments and estimates:
Revenue recognition and allowance for product returns
The Company recognizes revenues at the time of product shipment or delivery, depending upon when
title passes, to unaffiliated customers, and when all of the following have occurred: a firm sales agreement is
in place, pricing is fixed or determinable, and collection is reasonably assured. Revenue is recognized as the
net amount estimated to be received after deducting estimated amounts for product returns, discounts and
allowances (collectively “returns”). The Company estimates future product returns based upon historical
return rates and its reasonable judgment.
Allowance for accounts receivable
We maintain an allowance for doubtful accounts for estimated losses that may result from the inability
of our customers to make required payments. That estimate is based on historical collection experience,
current economic and market conditions, and a review of the current status of each customer’s trade
accounts receivable. If the financial condition of our customers were to deteriorate or our judgment
regarding their financial condition was to change negatively, additional allowances may be required
resulting in a charge to income in the period such determination was made. Conversely, if the financial
condition of our customers were to improve or our judgment regarding their financial condition was to
change positively, a reduction in the allowances may be required resulting in an increase in income in the
period such determination was made.
Allowance for inventory obsolescence
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of the inventory and the estimated market value based upon assumptions
about future demand and market conditions. If actual market conditions are less favorable than those
projected by us, additional inventory write-downs may be required resulting in a charge to income in the
period such determination was made. Conversely, if actual market conditions are more favorable than those
projected by us, a reduction in the write down may be required resulting in an increase in income in the
period such determination was made.
Derivatives and Hedge accounting
From time to time during the year, we enter into interest rate swaps to manage our interest rate
exposures. We designate the interest rate swaps as hedges of interest payments associated with the
underlying debt, and adjust interest expense to include the payment made or received under the swap
agreements. We estimate the fair market value of the swap agreements based on the current market value
of similar instruments.
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