Toro 2014 Annual Report Download - page 48

that are recorded based on historical loss trends, ongoing cycle- No other new accounting pronouncement that has been issued
count and periodic testing adjustments, and inventory levels. but not yet effective for us during fiscal 2014 has had or is
Though management considers reserve balances adequate and expected to have a material impact on our consolidated financial
proper, changes in economic conditions in specific markets in statements.
which we operate could have an effect on the reserve balances
required. ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Accounts and Notes Receivable Valuation. We value accounts
and notes receivable net of an allowance for doubtful accounts. We are exposed to market risk stemming from changes in foreign
Each fiscal quarter, we prepare an analysis of our ability to collect currency exchange rates, interest rates, and commodity prices. We
outstanding receivables that provides a basis for an allowance esti- are also exposed to equity market risk pertaining to the trading
mate for doubtful accounts. In doing so, we evaluate the age of price of our common stock. Changes in these factors could cause
our receivables, past collection history, current financial conditions fluctuations in our earnings and cash flows. See further discussion
of key customers, and economic conditions. Based on this evalua- on these market risks below.
tion, we establish a reserve for specific accounts and notes receiv-
able that we believe are uncollectible, as well as an estimate of Foreign Currency Exchange Rate Risk. In the normal course of
uncollectible receivables not specifically known. Deterioration in the business, we actively manage the exposure of our foreign currency
financial condition of any key customer, inability of customers to exchange rate market risk by entering into various hedging instru-
obtain bank credit lines, or a significant slow-down in the economy ments, authorized under company policies that place controls on
could have a material negative impact on our ability to collect these activities, with counterparties that are highly rated financial
accounts and notes receivable. We believe that an analysis of his- institutions. Our hedging activities involve primarily the use of for-
torical trends and our current knowledge of potential collection ward currency contracts. We also utilize cross currency swaps to
problems provide us with sufficient information to establish a rea- offset intercompany loan exposures. We use derivative instruments
sonable estimate for an allowance for doubtful accounts. However, only in an attempt to limit underlying exposure from currency fluc-
since we cannot predict with certainty future changes in the finan- tuations and to minimize earnings and cash flow volatility associ-
cial stability of our customers or in the general economy, our ated with foreign currency exchange rate changes and not for trad-
actual future losses from uncollectible accounts may differ from our ing purposes. We are exposed to foreign currency exchange rate
estimates. In the event we determined that a smaller or larger risk arising from transactions in the normal course of business,
uncollectible accounts reserve is appropriate, we would record a such as sales to third party customers, sales and loans to wholly
credit or charge to SG&A expense in the period that we made owned foreign subsidiaries, foreign plant operations, and
such a determination. purchases from suppliers. Because our products are manufactured
or sourced primarily from the U.S. and Mexico, a stronger U.S.
New Accounting Pronouncement to be Adopted dollar and Mexican peso generally have a negative impact on our
In May 2014, the Financial Accounting Standards Board (‘‘FASB’’) results from operations, while a weaker dollar and peso generally
issued Accounting Standards Update (‘‘ASU’’) No. 2014-09, Reve- have a positive effect. Our primary foreign currency exchange rate
nue from Contracts with Customers that updates the principles for exposures are with the Euro, the Australian dollar, the Canadian
recognizing revenue. The core principle of the guidance is that an dollar, the British pound, the Mexican peso, the Japanese yen, the
entity should recognize revenue to depict the transfer of promised Chinese Renminbi, and the Romanian New Leu against the U.S.
goods or services to customers in an amount that reflects the con- dollar, as well as the Romanian New Leu against the Euro.
sideration to which the entity expects to be entitled to in exchange We enter into various contracts, primarily forward contracts that
for those goods or services. The guidance provides a five-step change in value as foreign currency exchange rates change, to
analysis of transactions to determine when and how revenue is protect the value of existing foreign currency assets, liabilities,
recognized. The guidance also requires enhanced disclosures anticipated sales, and probable commitments. Decisions on
regarding the nature, amount, timing, and uncertainty of revenue whether to use such contracts are made based on the amount of
and cash flows arising from an entity’s contracts with customers. exposures to the currency involved and an assessment of the
We will adopt this guidance on November 1, 2017, as required. near-term market value for each currency. Worldwide foreign cur-
The guidance permits the use of either a retrospective or cumula- rency exchange rate exposures are reviewed monthly. The gains
tive effect transition method. We have not yet selected a transition and losses on these contracts offset changes in values of the
method and are currently evaluating the impact of the amended related exposures. Therefore, changes in values of these hedge
guidance on our existing revenue recognition policies and instruments are highly correlated with changes in market values of
procedures. underlying hedged items both at inception of the hedge and over
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