Toro 2015 Annual Report Download - page 59

expense in the period that includes the enactment date. A valua- Sales Promotions and Incentives
tion allowance is provided when, in management’s judgment, it is At the time of sale, the company records an estimate for sales
more likely than not that some portion or all of the deferred tax promotion and incentive costs. Examples of sales promotion and
asset will not be realized. The company has reflected the neces- incentive programs include off-invoice discounts, rebate programs,
sary deferred tax assets and liabilities in the accompanying consol- volume discounts, retail financing support, commissions, and other
idated balance sheets. Management believes the future tax deduc- sales discounts and promotional programs. The estimates of sales
tions will be realized principally through carryback to taxable promotion and incentive costs are based on the terms of the
income in prior years, future reversals of existing taxable tempo- arrangements with customers, historical payment experience, field
rary differences, and future taxable income. inventory levels, volume purchases, and expectations for changes
The company recognizes the effect of income tax positions only in relevant trends in the future. The expense of each program is
if those positions are more likely than not of being sustained. Rec- classified as a reduction from gross sales or as a component of
ognized income tax positions are measured at the largest amount selling, general, and administrative expense.
that is greater than 50 percent likely of being realized. Changes in
recognition or measurement are reflected in the period in which the Cost of Sales
change in judgment occurs. The company also records interest Cost of sales primarily comprises direct materials and supplies
and penalties related to unrecognized tax benefits in income tax consumed in the manufacture of product, as well as manufacturing
expense. labor, depreciation expense, and direct overhead expense neces-
sary to convert purchased materials and supplies into finished
Revenue Recognition product. Cost of sales also includes inbound freight costs, out-
The company recognizes revenue for product sales when persua- bound freight costs for shipping products to customers, obsoles-
sive evidence of an arrangement exists, title and risk of ownership cence expense, cost of services provided, and cash discounts on
passes to the customer, the sales price is fixed or determinable, payments to vendors.
and collectability is probable. These criteria are typically met at the
time product is shipped, or in the case of certain agreements, Selling, General, and Administrative Expense
when product is delivered. A provision is made at the time the Selling, general, and administrative expense primarily comprises
related revenue is recognized for estimated product returns, floor payroll and benefit costs, occupancy and operating costs of distri-
plan costs, rebates, and other sales promotion expenses. Sales, bution and corporate facilities, warranty expense, depreciation and
use, value-added, and other excise taxes are not recognized in amortization expense on non-manufacturing assets, advertising
revenue. Freight revenue billed to customers is included in net and marketing expenses, selling expenses, engineering and
sales. 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 to its products stored at the seasonal distribution cen- expensed as incurred.
ters. As the company’s products are removed from the seasonal
distribution centers by the key retailer and shipped to the key Cost of Financing Distributor / Dealer Inventory
retailer’s stores, title passes from the company to the key retailer. The company enters into limited inventory repurchase agreements
At that time, the company invoices the key retailer and recognizes with a third party financing company and Red Iron. The company
revenue for these consignment transactions. The company does has repurchased immaterial amounts of inventory under these
not offer a right of return for products shipped to the key retailer’s repurchase agreements over the last three fiscal years. However,
stores from the seasonal distribution centers. From time to time, an adverse change in retail sales could cause this situation to
the company also stores inventory on a consignment basis at other change, and thereby require the company to repurchase a portion
customers’ locations. The amount of consignment inventory as of of financed product. See Note 13 for additional information regard-
October 31, 2015 and 2014 was $23,566 and $22,080, ing the company’s repurchase arrangements.
respectively. Included as a reduction to net sales are costs associated with
Revenue earned from service and maintenance contracts is rec- programs under which the company shares the expense of financ-
ognized ratably over the contractual period. Revenue from ing distributor and dealer inventories, referred to as floor plan
extended warranty programs is deferred at the time the contract is expenses. This charge represents interest for a pre-established
sold and amortized into net sales using the straight-line method length of time based on a predefined rate from a contract with third
over the extended warranty period. party financing sources to finance distributor and dealer inventory
purchases. These financing arrangements are used by the com-
pany as a marketing tool to assist customers to buy inventory. The
53