Toro 2011 Annual Report Download - page 54

realized principally through carryback to taxable income in prior Sales Promotions and Incentives
years, future reversals of existing taxable temporary differences, At the time of sale, the company records an estimate for sales
and future taxable income. promotion and incentive costs. Examples of sales promotion and
The company recognizes the effect of income tax positions only incentive programs include rebate programs on certain professional
if those positions are more likely than not of being sustained. Rec- products sold to distributors, volume discounts, retail financing sup-
ognized income tax positions are measured at the largest amount port, cooperative advertising, commissions, and other sales dis-
that is greater than 50 percent likely of being realized. Changes in counts and promotional programs. The estimates of sales promo-
recognition or measurement are reflected in the period in which the tion and incentive costs are based on the terms of the
change in judgment occurs. The company also records interest arrangements with customers, historical payment experience, field
and penalties related to unrecognized tax benefits in income tax inventory levels, volume purchases, and expectations for changes
expense. in relevant trends in the future. The expense of each program is
classified either as a reduction from gross sales or as a compo-
Revenue Recognition nent of selling, general, and administrative expense.
The company recognizes revenue for product sales when persua-
sive evidence of an arrangement exists, title and risk of ownership Cost of Sales
passes to the customer, the sales price is fixed or determinable, Cost of sales primarily comprises direct materials and supplies
and collectability is probable. These criteria are typically met at the consumed in the manufacture of product, as well as manufacturing
time product is shipped, or in the case of certain agreements, labor, depreciation expense, and direct overhead expense neces-
when product is delivered. A provision is made at the time the sary to convert purchased materials and supplies into finished
related revenue is recognized for estimated product returns, floor product. Cost of sales also includes inbound freight costs, out-
plan costs, rebates, and other sales promotional expenses. Sales, bound freight costs for shipping products to customers, obsoles-
use, value-added, and other excise taxes are not recognized in cence expense, cost of services provided, and cash discounts on
revenue. Freight revenue billed to customers is included in net payments to vendors.
sales.
Retail customers may obtain financing through third-party financ- Selling, General, and Administrative Expense
ing companies to assist in their purchase of the company’s prod- Selling, general, and administrative expense primarily comprises
ucts. Most of these leases are classified as sales-type leases. payroll and benefit costs, occupancy and operating costs of distri-
However, based on the terms and conditions of the financing bution and corporate facilities, warranty expense, depreciation and
agreements, some transactions are classified as operating leases, amortization expense on non-manufacturing assets, advertising
which results in recognition of revenue over the lease term on a and marketing expenses, selling expenses, engineering and
straight-line basis. research costs, information systems costs, incentive and profit
The company ships some of its products to a key retailer’s sea- sharing expense, and other miscellaneous administrative costs,
sonal distribution centers on a consignment basis. The company such as legal costs for internal and outside services that are
retains title of its products stored at the seasonal distribution cen- expensed as incurred.
ters. As the company’s products are removed from the seasonal
Cost of Financing Distributor/Dealer Inventory
distribution centers by the key retailer and shipped to the key
The company enters into limited inventory repurchase agreements
retailer’s stores, title passes from the company to the key retailer.
with a third party financing company and Red Iron. The company
At that time, the company invoices the key retailer and recognizes
has repurchased immaterial amounts of inventory under these
revenue for these consignment transactions. The company does
repurchase agreements over the last three fiscal years. However,
not offer a right of return for products shipped to the key retailer’s
an adverse change in retail sales could cause this situation to
stores from the seasonal distribution centers. The amount of con-
change and thereby require the company to repurchase a portion
signment inventory as of October 31, 2011 and 2010 was $14,874
of financed product. See Note 13 for additional information regard-
and $12,819, respectively.
ing the company’s repurchase arrangements.
Revenue earned from service and maintenance contracts is rec-
Included as a reduction to net sales are costs associated with
ognized ratably over the contractual period. Revenue from
programs under which the company shares the expense of financ-
extended warranty programs is deferred at the time the contract is
ing distributor and dealer inventories, referred to as floor plan
sold and amortized into net sales using the straight-line method
expenses. This charge represents interest for a pre-established
over the extended warranty period.
length of time based on a predefined rate from a contract with third
party financing sources to finance distributor and dealer inventory
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