Toro 2007 Annual Report Download - page 47

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experience, field inventory levels, volume purchases, and expecta-
tions for changes in relevant trends in the future. Actual results
may differ from these estimates if competitive factors dictate the
need to enhance or reduce sales promotion and incentive accruals
or if customer usage and field inventory levels vary from historical
trends. Adjustments to sales promotions and incentive accruals
are made from time to time as actual usage becomes known in
order to properly estimate the amounts necessary to generate
consumer demand based on market conditions as of the balance
sheet date.
Inventory Valuation. We value our inventories at the lower of the
cost of inventory or net realizable value, with cost determined by
either the last-in, first-out (LIFO) method for most U.S. inventories
or the first-in, first-out (FIFO) method for all other inventories. We
establish reserves for excess, slow moving, and obsolete inventory
based on inventory levels, expected product lives, and forecasted
sales demand. Valuation of inventory can also be affected by
significant redesign of existing products or replacement of an
existing product by an entirely new generation product. In assess-
ing the ultimate realization of inventories, we are required to make
judgments as to future demand requirements compared with
inventory levels. Reserve requirements are developed according to
our projected demand requirements based on historical demand,
competitive factors, and technological and product life cycle
changes. It is possible that an increase in our reserve may be
required in the future if there is a significant decline in demand for
our products and we do not adjust our manufacturing production
accordingly.
We also record a reserve for inventory shrinkage. Our inventory
shrinkage reserve represents anticipated physical inventory losses
that are recorded based on historical loss trends, ongoing cycle-
count and periodic testing adjustments, and inventory levels.
Though management considers reserve balances adequate and
proper, changes in economic conditions in specific markets in
which we operate could have an effect on the reserve balances
required.
Accounts and Notes Receivable Valuation. We value accounts
and notes receivable, net of an allowance for doubtful accounts.
Each fiscal quarter, we prepare an analysis of our ability to collect
outstanding receivables that provides a basis for an allowance
estimate for doubtful accounts. In doing so, we evaluate the age of
our receivables, past collection history, current financial conditions
of key customers, and economic conditions. Based on this evalua-
tion, we establish a reserve for specific accounts and notes
receivable that we believe are uncollectible, as well as an estimate
of uncollectible receivables not specifically known. Portions of our
accounts receivable are protected by a security interest in products
held by customers, which minimizes our collection exposure. A
deterioration in the financial condition of any key customer or a
significant slow-down in the economy could have a material nega-
tive impact on our ability to collect a portion or all of the accounts
and notes receivable. We believe that an analysis of historical
trends and our current knowledge of potential collection problems
provide us with sufficient information to establish a reasonable
estimate for an allowance for doubtful accounts. However, since
we cannot predict with certainty future changes in the financial
stability of our customers or in the general economy, our actual
future losses from uncollectible accounts may differ from our
estimates. In the event we determined that a smaller or larger
uncollectible accounts reserve is appropriate, we would record a
credit or charge to SG&A expense in the period that we made such
a determination.
New Accounting Pronouncements to be Adopted
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 141 (Revised 2007), “Business Combinations.”
SFAS No. 141R applies to all business combinations and requires
most identifiable assets, liabilities, noncontrolling interests, and
goodwill acquired to be recorded at “full fair value.” We will adopt
the provisions of SFAS No. 141R to any business combination
occurring on or after November 1, 2009, as required.
In September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements.” SFAS No. 157 defines fair value, estab-
lishes a framework for measuring fair value, and expands
disclosures concerning fair value. We will adopt the provisions of
SFAS No. 157 for financial assets and liabilities and nonfinancial
assets and liabilities measured at fair value on a recurring basis
during the first quarter of fiscal 2009, as required. We will adopt
the provisions of SFAS No. 157 for nonfinancial assets and liabili-
ties that are not required or permitted to be measured on a
recurring basis during the first quarter of fiscal 2010, as required.
We are currently evaluating the requirements of SFAS No. 157
and, we do not expect this new pronouncement will have a mate-
rial impact on our consolidated financial condition or results of
operations.
In August 2006, the FASB issued Staff Position No. AUG AIR-1,
“Accounting for Planned Major Maintenance Activities.” This Staff
Position prohibits the use of the accrue-in-advance method of
accounting for planned major maintenance activities in annual and
interim financial reporting periods. We adopted the provisions of
this Staff Position as of November 1, 2007, as required, and the
adoption of this Staff Position will not have a material impact on
our fiscal 2008 consolidated results of operations or financial
condition.
In July 2006, the FASB issued Interpretation No. 48, “Account-
ing for Uncertainty in Income Taxes” (FIN No. 48). This
interpretation clarifies the accounting for uncertainty in income
taxes recognized in an entity’s financial statements in accordance