Toro 2009 Annual Report Download - page 42

CRITICAL ACCOUNTING POLICIES AND ESTIMATES Sales Promotions and Incentives. At the time of sale to a cus-
In preparing our consolidated financial statements in conformity tomer, we record an estimate for sales promotion and incentive
with U.S. generally accepted accounting principles, we must make costs which are classified as a reduction from gross sales or as a
decisions that impact the reported amounts of assets, liabilities, component of SG&A expense. Examples of sales promotion and
revenues and expenses, and related disclosures. Such decisions incentive programs include rebate programs on certain professional
include the selection of the appropriate accounting principles to be products sold to distributors, volume discounts, retail financing sup-
applied and the assumptions on which to base accounting esti- port, floor planning, cooperative advertising, commissions, and
mates. In reaching such decisions, we apply judgments based on other sales discounts and promotional programs. The estimates for
our understanding and analysis of the relevant circumstances, his- sales promotion and incentive costs are based on the terms of the
torical experience, and actuarial valuations. Actual amounts could arrangements with customers, historical payment experience, field
differ from those estimated at the time the consolidated financial inventory levels, volume purchases, and expectations for changes
statements are prepared. in relevant trends in the future. Actual results may differ from these
Our significant accounting policies are described in Note 1 of the estimates if competitive factors dictate the need to enhance or
notes to our consolidated financial statements. Some of those sig- reduce sales promotion and incentive accruals or if customer
nificant accounting policies require us to make difficult subjective usage and field inventory levels vary from historical trends. Adjust-
or complex judgments or estimates. An accounting estimate is con- ments to sales promotions and incentive accruals are made from
sidered to be critical if it meets both of the following criteria: (i) the time to time as actual usage becomes known in order to properly
estimate requires assumptions about matters that are highly uncer- estimate the amounts necessary to generate consumer demand
tain at the time the accounting estimate is made, and (ii) different based on market conditions as of the balance sheet date.
estimates reasonably could have been used, or changes in the Inventory Valuation. We value our inventories at the lower of
estimate that are reasonably likely to occur from period to period the cost of inventory or net realizable value, with cost determined
may have a material impact on the presentation of our financial by either the LIFO method for most U.S. inventories or the first-in,
condition, changes in financial condition, or results of operations. first-out (FIFO) method for all other inventories. We establish
Our critical accounting estimates include the following: reserves for excess, slow moving, and obsolete inventory based
Warranty Reserve. Warranty coverage on our products ranges on inventory levels, expected product life, and forecasted sales
from a period of six months to seven years, and generally covers demand. Valuation of inventory can also be affected by significant
parts, labor, and other expenses for non-maintenance repairs. redesign of existing products or replacement of an existing product
Warranty coverage generally does not cover operator abuse or by an entirely new generation product. In assessing the ultimate
improper use. At the time of sale, we accrue a warranty reserve by realization of inventories, we are required to make judgments as to
product line for estimated costs in connection with future warranty future demand requirements compared with inventory levels.
claims. We also establish reserves for major rework campaigns. Reserve requirements are developed according to our projected
The amount of our warranty reserves is based primarily on the demand requirements based on historical demand, competitive fac-
estimated number of products under warranty, historical average tors, and technological and product life cycle changes. It is possi-
costs incurred to service warranty claims, the trend in the historical ble that an increase in our reserve may be required in the future if
ratio of claims to sales, and the historical length of time between there is a significant decline in demand for our products and we do
the sale and resulting warranty claim. We periodically assess the not adjust our manufacturing production accordingly.
adequacy of our warranty reserves based on changes in these We also record a reserve for inventory shrinkage. Our inventory
factors and record any necessary adjustments if actual claim expe- shrinkage reserve represents anticipated physical inventory losses
rience indicates that adjustments are necessary. Actual claims that are recorded based on historical loss trends, ongoing cycle-
could be higher or lower than amounts estimated, as the amount count and periodic testing adjustments, and inventory levels.
and value of warranty claims are subject to variation due to such Though management considers reserve balances adequate and
factors as performance of new products, significant manufacturing proper, changes in economic conditions in specific markets in
or design defects not discovered until after the product is delivered which we operate could have an effect on the reserve balances
to customers, product failure rates, and higher or lower than required.
expected service costs for a repair. We believe that analysis of Accounts and Notes Receivable Valuation. We value accounts
historical trends and knowledge of potential manufacturing or and notes receivable, net of an allowance for doubtful accounts.
design problems provide sufficient information to establish a rea- Each fiscal quarter, we prepare an analysis of our ability to collect
sonable estimate for warranty claims at the time of sale. However, outstanding receivables that provides a basis for an allowance esti-
since we cannot predict with certainty future warranty claims or mate for doubtful accounts. In doing so, we evaluate the age of
costs associated with servicing those claims, our actual warranty our receivables, past collection history, current financial conditions
costs may differ from our estimates. An unexpected increase in of key customers, and economic conditions. Based on this evalua-
warranty claims or in the costs associated with servicing those tion, we establish a reserve for specific accounts and notes receiv-
claims would result in an increase in our warranty accrual and a able that we believe are uncollectible, as well as an estimate of
decrease in our net earnings.
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