Sunbeam 2007 Annual Report Download - page 77

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The Company enters into interest rate swaps to manage interest rate risk on its variable rate debt. The
Company designates the interest rate swaps as cash flow hedges of the interest rate risk attributable to forecasted
variable interest payments. Interest expense is adjusted to include the payment made or received under the swap
agreements. The fair market value of the swap agreements was estimated based on the current market value of
similar instruments (see Note 10).
The Company uses forward foreign currency contracts to mitigate the foreign currency exchange rate
exposure on the cash flows related to forecasted inventory purchases and sales. The derivatives used to hedge
these forecasted transactions that meet the criteria for hedge accounting are accounted for as cash flow hedges.
The effective portion of the gains or losses on these derivatives are deferred as a component of accumulated other
comprehensive income and are recognized in earnings at the same time that the hedged item affects earnings and
are included in the same caption in the statement of operations as the underlying hedged item.
Financial instruments that potentially subject the Company to credit risk consist primarily of trade
receivables and interest-bearing investments. Trade receivable credit risk is limited due to the diversity of the
Company’s customers and the Company’s ongoing credit review procedures. Collateral for trade receivables is
generally not required. The Company places its interest-bearing cash equivalents with major financial
institutions.
Unless otherwise disclosed in the notes to the consolidated financial statements, the estimated fair value of
financial assets and liabilities approximates carrying value.
Share-Based Compensation Cost
Effective October 1, 2005, the Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment”
(“SFAS 123r”), which requires the measurement and recognition of all unvested outstanding stock-based
payment awards made to employees and directors based on estimated fair value at date of grant. Prior to this as
permitted under SFAS No. 123, the Company accounted for the issuance of stock options and restricted stock
using the intrinsic value method in accordance with Accounting Principles Opinion No. 25, Accounting for Stock
Issued to Employees (“APB 25”) and related interpretations. Under SFAS 123r, compensation cost is recognized
on a straight-line basis in the Consolidated Statements of Income related to stock options and restricted stock
expected to vest as well as the Company’s employee stock purchase plans. Prior to this under the aforementioned
intrinsic value method, the Company did not recognize compensation cost related to stock options in the
Consolidated Statements of Income when the exercise price equaled the market price of the underlying stock on
the date of grant. However, the Company would recognize compensation cost in circumstances where the market
price of the underlying stock exceeds the exercise price of the Company’s stock options on the date of grant.
The fair value of stock options was determined using the Black-Scholes option-pricing model which was
previously used for disclosing the Company’s pro forma information under SFAS 123. The fair value of the
market-based restricted stock awards was determined using a Monte Carlo simulation embedded in a lattice
model, and for all other restricted stock awards based on the closing price of the Company’s common stock on
the date of grant. The determination of the fair value of the Company’s stock option awards and restricted stock
awards is based on a variety of factors including, but not limited to, the Company’s common stock price,
expected stock price volatility over the expected life of awards, and actual and projected exercise behavior (see
Note 13). Additionally pursuant to SFAS 123r, the Company has estimated forfeitures for options and restricted
stock awards at the dates of grant based on historical experience and will revise as necessary if actual forfeitures
differ from these estimates.
The Company issues restricted share awards whose restrictions lapse upon either the passage of time
(service vesting), achieving performance targets, attaining Company common stock price thresholds, or some
combination of these restrictions. For those restricted share awards with common stock price thresholds, the fair
values were determined using a Monte Carlo simulation embedded in a lattice model. The fair value for all other
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