CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results
of operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation
of these financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments,
including among others, those related to product returns, bad
debts, inventory obsolescence, investments, intangible assets,
income taxes, warranty obligations, restructuring costs, retirement
and insurance costs, and contingencies and litigation. Those
estimates and assumptions are based on our historical experience,
our observation of trends in the industry, and various other
factors that are believed to be reasonable under the circumstances
and form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We record reductions to revenue for estimated returns. Should
a greater amount of products be returned to us, additional reductions
to revenue may be required. We also provide for the estimated
cost of product warranties at the time revenue is recognized.
Although our facilities undergo quality assurance and testing
procedures throughout the production process and we monitor
our suppliers for Fisher branded products, our warranty obligation
is affected by product failure rates, material usage and service
delivery costs incurred in correcting a product failure. Although
our actual product returns and warranty costs have not historically
fluctuated, should actual product failure rates, material usage
or service delivery costs differ from our estimates, revisions
to the estimated warranty liability may be required.
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. We provide for the allowance for doubtful
accounts when it becomes likely and known that the financial
condition of our customer deteriorated, resulting in the customer’s
inability to make payments. If those conditions change, changes
to the allowance for doubtful accounts may be necessary. Historically,
our annual provision for doubtful accounts has approximated
the related write-offs.
We write down our inventory for estimated obsolescence to the
difference between the cost of inventory and the estimated market
value based upon assumptions about current and future demand
and market conditions. For our inventories of distributed products,
current demand is generally the last twelve-months sales and
future demand is generally forecasted for a twelve-month period.
If actual future demand or market conditions are less favorable
than those projected by management, additional inventory write-downs
may be required.
We record accruals for environmental liabilities based on current
interpretations of environmental laws and regulations when it
is probable that a liability has been incurred and the amount
can be reasonably estimated. Our estimates are based upon reports
prepared by environmental specialists and management’s
knowledge and experiences with these environmental matters.
If interpretations of applicable laws and regulations, cleanup
methods or the extent of our responsibility change from our
current estimates, revisions to our estimated environmental
liability may be required.
We annually perform an evaluation of whether goodwill and indefinite-lived
intangible assets are impaired or when events occur or circumstances
change that would more likely than not reduce the fair value
of a reporting unit below its carrying amount. Fair value is
determined using a combination of discounted cash flow and multiple
of earnings valuation techniques. Our estimates are based upon
historical trends, management’s knowledge and experiences,
and overall economic factors. To the extent those factors may
change and impact the fair value of a reporting unit, measurement
and writedowns, if any, of goodwill and indefinite-lived intangible
assets may be required.
The Company has defined benefit pension plans covering a significant
number of domestic and international employees. Accounting for
these plans requires the use of actuarial assumptions including
estimates on the expected long-term rate of return on assets
and discount rates. In order to make informed assumptions, management
relies on outside actuarial experts as well as public market
data and general economic information. Our pension cost is based
on certain assumptions, including our expected long-term rate
of return on plan assets. A majority of our plans benefit obligations
and plan assets relate to our U.S.-based plan which returned
an approximate 7 percent loss on plan assets for 2002 and a
ten-year return on plan assets of approximately 9 percent. As
of December 31, 2002, we assumed a long-term rate of return
on plan assets of 8.75 percent. A 50 basis point change in our
long-term rate of return on plan assets assumption would result
in a change in our pension cost of approximately $1.0 million.
We continually assess these assumptions based on market conditions,
and if those conditions change, pension cost may be adjusted
accordingly. At December 31, 2002 our pension programs were
underfunded by approximately $24 million, the result of underfunded
international plans. Our U.S.-based plan was fully funded at
December 31, 2002. In addition, our underfunded status includes
an additional $20 million for an executive retirement program
which has assets approximating this obligation included in other
assets on our balance sheet. Each of our plans is in compliance
with minimum funding requirements.
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