CSS » Topics » Critical Accounting Policies

These excerpts taken from the CSS 10-K filed Jun 2, 2009.
Critical Accounting Policies
 
In preparing our consolidated financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. Below are the most significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
 
Revenue
 
Revenue is recognized from product sales when goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably assured. The Company records estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions. In limited cases, the Company may provide the right to return product as part of its customer programs with certain customers. The Company also records estimated reductions to revenue, based primarily on historical experience, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales, and the related reserves are shown as a reduction of accounts receivable, except for reserves for customer programs which are shown as a current liability. If the amount of actual customer returns and chargebacks were to increase or decrease significantly from the estimated amount, revisions to the estimated allowance would be required.
 
Accounts Receivable
 
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. While some customers are granted return rights as part of their sales program, customers generally do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. The Company is generally not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company endeavors to mitigate its exposure to bad debts by evaluating the creditworthiness of its major customers utilizing established credit limits and purchasing credit insurance when warranted in management’s judgment and available on terms that management deems appropriate. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customer’s creditworthiness, historical recovery percentages and outstanding customer deductions and program arrangements.
 
Inventory Valuation
 
Inventories are valued at the lower of cost or market. Cost is primarily determined by the first-in, first-out method although certain inventories are valued based on the last-in, first-out method. The Company writes down its inventory for estimated obsolescence in an amount equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts. Additional inventory write downs could result from unanticipated additional carryover of finished goods and raw materials, or from lower proceeds offered by parties in our traditional closeout channels.
 
Goodwill
 
Goodwill is subject to an assessment for impairment using a two-step fair value-based test, the first step of which must be performed at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. The Company performs its required annual assessment as of the fiscal year end. The first step of the test compares the fair value of a reporting unit to its carrying amount, including goodwill, as of the date of the test. The Company uses a dual approach to determine the fair value of its reporting units including both a market


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approach and an income approach. The market approach computes fair value using a multiple of earnings before interest, income taxes, depreciation and amortization which was developed considering both the multiples of recent transactions as well as trading multiples of consumer products companies. The income approach is based on the present value of discounted cash flows and terminal value projected for each reporting unit. The income approach requires significant judgments, including the Company’s projected net cash flows, the weighted average cost of capital (“WACC”) used to discount the cash flows and terminal value assumptions. The projected net cash flows are derived using the most recent available estimate for each reporting unit. The WACC rate is based on an average of the capital structure, cost of capital and inherent business risk profiles of the Company and peer consumer products companies. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each reporting unit.
 
The Company then corroborates the reasonableness of the total fair value of the reporting units by reconciling the aggregate fair values of the reporting units to the Company’s total market capitalization adjusted to include an estimated control premium. The estimated control premium is derived from reviewing observable transactions involving the purchase of controlling interests in comparable companies. The market capitalization is calculated using the relevant shares outstanding at the testing date and an average closing stock price which considers volatility around the test date. The exercise of reconciling the market capitalization to the computed fair value further supports the Company’s conclusion on the fair value. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the implied fair value of the goodwill. If the implied fair value of the goodwill is less than the carrying amount of the goodwill, an impairment loss would be reported.
 
Accounting for Income Taxes
 
As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax expense (state, federal and foreign), including the impact of permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant and equipment, and valuation of inventories. Temporary differences and operating loss and credit carryforwards result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase such allowance in a period, we would record additional tax expense in the accompanying consolidated statements of operations. The management of the Company periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period.
 
Share-Based Compensation
 
Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment,” using the modified prospective transition method and began accounting for its share-based compensation using a fair-value based recognition method. Under the provisions of SFAS No. 123R, share-based compensation cost is estimated at the grant date based on the fair value of the award and is expensed ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the grant date requires considerable judgment, including estimating stock price volatility and the expected option life.
 
The Company uses the Black-Scholes option valuation model to value employee stock options. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life assumptions are also derived from historical data. Had the Company used alternative valuation methodologies and assumptions, compensation cost for share-based payments could be significantly different. The Company recognizes compensation expense using the straight-line amortization method for share-based compensation awards with graded vesting.


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Table of Contents

Critical Accounting Policies
 
In preparing our consolidated financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. Below are the most significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
 
Revenue
 
Revenue is recognized from product sales when goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably assured. The Company records estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions. In limited cases, the Company may provide the right to return product as part of its customer programs with certain customers. The Company also records estimated reductions to revenue, based primarily on historical experience, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales, and the related reserves are shown as a reduction of accounts receivable, except for reserves for customer programs which are shown as a current liability. If the amount of actual customer returns and chargebacks were to increase or decrease significantly from the estimated amount, revisions to the estimated allowance would be required.
 
Accounts Receivable
 
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. While some customers are granted return rights as part of their sales program, customers generally do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. The Company is generally not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company endeavors to mitigate its exposure to bad debts by evaluating the creditworthiness of its major customers utilizing established credit limits and purchasing credit insurance when warranted in management’s judgment and available on terms that management deems appropriate. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customer’s creditworthiness, historical recovery percentages and outstanding customer deductions and program arrangements.
 
Inventory Valuation
 
Inventories are valued at the lower of cost or market. Cost is primarily determined by the first-in, first-out method although certain inventories are valued based on the last-in, first-out method. The Company writes down its inventory for estimated obsolescence in an amount equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts. Additional inventory write downs could result from unanticipated additional carryover of finished goods and raw materials, or from lower proceeds offered by parties in our traditional closeout channels.
 
Goodwill
 
Goodwill is subject to an assessment for impairment using a two-step fair value-based test, the first step of which must be performed at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. The Company performs its required annual assessment as of the fiscal year end. The first step of the test compares the fair value of a reporting unit to its carrying amount, including goodwill, as of the date of the test. The Company uses a dual approach to determine the fair value of its reporting units including both a market


18


Table of Contents

approach and an income approach. The market approach computes fair value using a multiple of earnings before interest, income taxes, depreciation and amortization which was developed considering both the multiples of recent transactions as well as trading multiples of consumer products companies. The income approach is based on the present value of discounted cash flows and terminal value projected for each reporting unit. The income approach requires significant judgments, including the Company’s projected net cash flows, the weighted average cost of capital (“WACC”) used to discount the cash flows and terminal value assumptions. The projected net cash flows are derived using the most recent available estimate for each reporting unit. The WACC rate is based on an average of the capital structure, cost of capital and inherent business risk profiles of the Company and peer consumer products companies. We believe the use of multiple valuation techniques results in a more accurate indicator of the fair value of each reporting unit.
 
The Company then corroborates the reasonableness of the total fair value of the reporting units by reconciling the aggregate fair values of the reporting units to the Company’s total market capitalization adjusted to include an estimated control premium. The estimated control premium is derived from reviewing observable transactions involving the purchase of controlling interests in comparable companies. The market capitalization is calculated using the relevant shares outstanding at the testing date and an average closing stock price which considers volatility around the test date. The exercise of reconciling the market capitalization to the computed fair value further supports the Company’s conclusion on the fair value. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the implied fair value of the goodwill. If the implied fair value of the goodwill is less than the carrying amount of the goodwill, an impairment loss would be reported.
 
Accounting for Income Taxes
 
As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax expense (state, federal and foreign), including the impact of permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant and equipment, and valuation of inventories. Temporary differences and operating loss and credit carryforwards result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase such allowance in a period, we would record additional tax expense in the accompanying consolidated statements of operations. The management of the Company periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period.
 
Share-Based Compensation
 
Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment,” using the modified prospective transition method and began accounting for its share-based compensation using a fair-value based recognition method. Under the provisions of SFAS No. 123R, share-based compensation cost is estimated at the grant date based on the fair value of the award and is expensed ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the grant date requires considerable judgment, including estimating stock price volatility and the expected option life.
 
The Company uses the Black-Scholes option valuation model to value employee stock options. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life assumptions are also derived from historical data. Had the Company used alternative valuation methodologies and assumptions, compensation cost for share-based payments could be significantly different. The Company recognizes compensation expense using the straight-line amortization method for share-based compensation awards with graded vesting.


19


Table of Contents

Critical
Accounting Policies



 



In preparing our consolidated financial statements, management
is required to make estimates and assumptions that, among other
things, affect the reported amounts of assets, liabilities,
revenue and expenses. These estimates and assumptions are most
significant where they involve levels of subjectivity and
judgment necessary to account for highly uncertain matters or
matters susceptible to change, and where they can have a
material impact on our financial condition and operating
performance. Below are the most significant estimates and
related assumptions used in the preparation of our consolidated
financial statements. If actual results were to differ
materially from the estimates made, the reported results could
be materially affected.


 




Revenue


 



Revenue is recognized from product sales when goods are shipped,
title and risk of loss have been transferred to the customer and
collection is reasonably assured. The Company records estimated
reductions to revenue for customer programs, which may include
special pricing agreements for specific customers, volume
incentives and other promotions. In limited cases, the Company
may provide the right to return product as part of its customer
programs with certain customers. The Company also records
estimated reductions to revenue, based primarily on historical
experience, for customer returns and chargebacks that may arise
as a result of shipping errors, product damaged in transit or
for other reasons that become known subsequent to recognizing
the revenue. These provisions are recorded in the period that
the related sale is recognized and are reflected as a reduction
from gross sales, and the related reserves are shown as a
reduction of accounts receivable, except for reserves for
customer programs which are shown as a current liability. If the
amount of actual customer returns and chargebacks were to
increase or decrease significantly from the estimated amount,
revisions to the estimated allowance would be required.


 




Accounts
Receivable



 



The Company offers seasonal dating programs related to certain
seasonal product offerings pursuant to which customers that
qualify for such programs are offered extended payment terms.
While some customers are granted return rights as part of their
sales program, customers generally do not have the right to
return product except for reasons the Company believes are
typical of our industry, including damaged goods, shipping
errors or similar occurrences. The Company is generally not
required to repurchase products from its customers, nor does the
Company have any regular practice of doing so. In addition, the
Company endeavors to mitigate its exposure to bad debts by
evaluating the creditworthiness of its major customers utilizing
established credit limits and purchasing credit insurance when
warranted in management’s judgment and available on terms
that management deems appropriate. Bad debt and returns and
allowances reserves are recorded as an offset to accounts
receivable while reserves for customer programs are recorded as
accrued liabilities. The Company evaluates accounts receivable
related reserves and accruals monthly by specifically reviewing
customer’s creditworthiness, historical recovery
percentages and outstanding customer deductions and program
arrangements.


 




Inventory
Valuation



 



Inventories are valued at the lower of cost or market. Cost is
primarily determined by the
first-in,
first-out method although certain inventories are valued based
on the
last-in,
first-out method. The Company writes down its inventory for
estimated obsolescence in an amount equal to the difference
between the cost of the inventory and the estimated market value
based upon assumptions about future demand, market conditions,
customer planograms and sales forecasts. Additional inventory
write downs could result from unanticipated additional carryover
of finished goods and raw materials, or from lower proceeds
offered by parties in our traditional closeout channels.


 




Goodwill


 



Goodwill is subject to an assessment for impairment using a
two-step fair value-based test, the first step of which must be
performed at least annually, or more frequently if events or
circumstances indicate that goodwill might be impaired. The
Company performs its required annual assessment as of the fiscal
year end. The first step of the test compares the fair value of
a reporting unit to its carrying amount, including goodwill, as
of the date of the test. The Company uses a dual approach to
determine the fair value of its reporting units including both a
market





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Table of Contents






approach and an income approach. The market approach computes
fair value using a multiple of earnings before interest, income
taxes, depreciation and amortization which was developed
considering both the multiples of recent transactions as well as
trading multiples of consumer products companies. The income
approach is based on the present value of discounted cash flows
and terminal value projected for each reporting unit. The income
approach requires significant judgments, including the
Company’s projected net cash flows, the weighted average
cost of capital (“WACC”) used to discount the cash
flows and terminal value assumptions. The projected net cash
flows are derived using the most recent available estimate for
each reporting unit. The WACC rate is based on an average of the
capital structure, cost of capital and inherent business risk
profiles of the Company and peer consumer products companies. We
believe the use of multiple valuation techniques results in a
more accurate indicator of the fair value of each reporting unit.


 



The Company then corroborates the reasonableness of the total
fair value of the reporting units by reconciling the aggregate
fair values of the reporting units to the Company’s total
market capitalization adjusted to include an estimated control
premium. The estimated control premium is derived from reviewing
observable transactions involving the purchase of controlling
interests in comparable companies. The market capitalization is
calculated using the relevant shares outstanding at the testing
date and an average closing stock price which considers
volatility around the test date. The exercise of reconciling the
market capitalization to the computed fair value further
supports the Company’s conclusion on the fair value. If the
carrying amount of the reporting unit exceeds its fair value,
the second step is performed. The second step compares the
carrying amount of the goodwill to the implied fair value of the
goodwill. If the implied fair value of the goodwill is less than
the carrying amount of the goodwill, an impairment loss would be
reported.


 




Accounting
for Income Taxes



 



As part of the process of preparing our consolidated financial
statements, we are required to estimate our actual current tax
expense (state, federal and foreign), including the impact of
permanent and temporary differences resulting from differing
bases and treatment of items for tax and accounting purposes,
such as the carrying value of intangibles, deductibility of
expenses, depreciation of property, plant and equipment, and
valuation of inventories. Temporary differences and operating
loss and credit carryforwards result in deferred tax assets and
liabilities, which are included within our consolidated balance
sheets. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income. Actual
results could differ from this assessment if sufficient taxable
income is not generated in future periods. To the extent we
determine the need to establish a valuation allowance or
increase such allowance in a period, we would record additional
tax expense in the accompanying consolidated statements of
operations. The management of the Company periodically estimates
the probable tax obligations of the Company using historical
experience in tax jurisdictions and informed judgments. There
are inherent uncertainties related to the interpretation of tax
regulations. The judgments and estimates made at a point in time
may change based on the outcome of tax audits, as well as
changes to or further interpretations of regulations. If such
changes take place, there is a risk that the tax rate may
increase or decrease in any period.


 




Share-Based
Compensation



 



Effective April 1, 2006, the Company adopted Statement of
Financial Accounting Standards (“SFAS”) No. 123R,
“Share Based Payment,” using the modified prospective
transition method and began accounting for its share-based
compensation using a fair-value based recognition method. Under
the provisions of SFAS No. 123R, share-based
compensation cost is estimated at the grant date based on the
fair value of the award and is expensed ratably over the
requisite service period of the award. Determining the
appropriate fair-value model and calculating the fair value of
share-based awards at the grant date requires considerable
judgment, including estimating stock price volatility and the
expected option life.


 



The Company uses the Black-Scholes option valuation model to
value employee stock options. The Company estimates stock price
volatility based on historical volatility of its common stock.
Estimated option life assumptions are also derived from
historical data. Had the Company used alternative valuation
methodologies and assumptions, compensation cost for share-based
payments could be significantly different. The Company
recognizes compensation expense using the straight-line
amortization method for share-based compensation awards with
graded vesting.





19





Table of Contents







Critical
Accounting Policies



 



In preparing our consolidated financial statements, management
is required to make estimates and assumptions that, among other
things, affect the reported amounts of assets, liabilities,
revenue and expenses. These estimates and assumptions are most
significant where they involve levels of subjectivity and
judgment necessary to account for highly uncertain matters or
matters susceptible to change, and where they can have a
material impact on our financial condition and operating
performance. Below are the most significant estimates and
related assumptions used in the preparation of our consolidated
financial statements. If actual results were to differ
materially from the estimates made, the reported results could
be materially affected.


 




Revenue


 



Revenue is recognized from product sales when goods are shipped,
title and risk of loss have been transferred to the customer and
collection is reasonably assured. The Company records estimated
reductions to revenue for customer programs, which may include
special pricing agreements for specific customers, volume
incentives and other promotions. In limited cases, the Company
may provide the right to return product as part of its customer
programs with certain customers. The Company also records
estimated reductions to revenue, based primarily on historical
experience, for customer returns and chargebacks that may arise
as a result of shipping errors, product damaged in transit or
for other reasons that become known subsequent to recognizing
the revenue. These provisions are recorded in the period that
the related sale is recognized and are reflected as a reduction
from gross sales, and the related reserves are shown as a
reduction of accounts receivable, except for reserves for
customer programs which are shown as a current liability. If the
amount of actual customer returns and chargebacks were to
increase or decrease significantly from the estimated amount,
revisions to the estimated allowance would be required.


 




Accounts
Receivable



 



The Company offers seasonal dating programs related to certain
seasonal product offerings pursuant to which customers that
qualify for such programs are offered extended payment terms.
While some customers are granted return rights as part of their
sales program, customers generally do not have the right to
return product except for reasons the Company believes are
typical of our industry, including damaged goods, shipping
errors or similar occurrences. The Company is generally not
required to repurchase products from its customers, nor does the
Company have any regular practice of doing so. In addition, the
Company endeavors to mitigate its exposure to bad debts by
evaluating the creditworthiness of its major customers utilizing
established credit limits and purchasing credit insurance when
warranted in management’s judgment and available on terms
that management deems appropriate. Bad debt and returns and
allowances reserves are recorded as an offset to accounts
receivable while reserves for customer programs are recorded as
accrued liabilities. The Company evaluates accounts receivable
related reserves and accruals monthly by specifically reviewing
customer’s creditworthiness, historical recovery
percentages and outstanding customer deductions and program
arrangements.


 




Inventory
Valuation



 



Inventories are valued at the lower of cost or market. Cost is
primarily determined by the
first-in,
first-out method although certain inventories are valued based
on the
last-in,
first-out method. The Company writes down its inventory for
estimated obsolescence in an amount equal to the difference
between the cost of the inventory and the estimated market value
based upon assumptions about future demand, market conditions,
customer planograms and sales forecasts. Additional inventory
write downs could result from unanticipated additional carryover
of finished goods and raw materials, or from lower proceeds
offered by parties in our traditional closeout channels.


 




Goodwill


 



Goodwill is subject to an assessment for impairment using a
two-step fair value-based test, the first step of which must be
performed at least annually, or more frequently if events or
circumstances indicate that goodwill might be impaired. The
Company performs its required annual assessment as of the fiscal
year end. The first step of the test compares the fair value of
a reporting unit to its carrying amount, including goodwill, as
of the date of the test. The Company uses a dual approach to
determine the fair value of its reporting units including both a
market





18





Table of Contents






approach and an income approach. The market approach computes
fair value using a multiple of earnings before interest, income
taxes, depreciation and amortization which was developed
considering both the multiples of recent transactions as well as
trading multiples of consumer products companies. The income
approach is based on the present value of discounted cash flows
and terminal value projected for each reporting unit. The income
approach requires significant judgments, including the
Company’s projected net cash flows, the weighted average
cost of capital (“WACC”) used to discount the cash
flows and terminal value assumptions. The projected net cash
flows are derived using the most recent available estimate for
each reporting unit. The WACC rate is based on an average of the
capital structure, cost of capital and inherent business risk
profiles of the Company and peer consumer products companies. We
believe the use of multiple valuation techniques results in a
more accurate indicator of the fair value of each reporting unit.


 



The Company then corroborates the reasonableness of the total
fair value of the reporting units by reconciling the aggregate
fair values of the reporting units to the Company’s total
market capitalization adjusted to include an estimated control
premium. The estimated control premium is derived from reviewing
observable transactions involving the purchase of controlling
interests in comparable companies. The market capitalization is
calculated using the relevant shares outstanding at the testing
date and an average closing stock price which considers
volatility around the test date. The exercise of reconciling the
market capitalization to the computed fair value further
supports the Company’s conclusion on the fair value. If the
carrying amount of the reporting unit exceeds its fair value,
the second step is performed. The second step compares the
carrying amount of the goodwill to the implied fair value of the
goodwill. If the implied fair value of the goodwill is less than
the carrying amount of the goodwill, an impairment loss would be
reported.


 




Accounting
for Income Taxes



 



As part of the process of preparing our consolidated financial
statements, we are required to estimate our actual current tax
expense (state, federal and foreign), including the impact of
permanent and temporary differences resulting from differing
bases and treatment of items for tax and accounting purposes,
such as the carrying value of intangibles, deductibility of
expenses, depreciation of property, plant and equipment, and
valuation of inventories. Temporary differences and operating
loss and credit carryforwards result in deferred tax assets and
liabilities, which are included within our consolidated balance
sheets. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income. Actual
results could differ from this assessment if sufficient taxable
income is not generated in future periods. To the extent we
determine the need to establish a valuation allowance or
increase such allowance in a period, we would record additional
tax expense in the accompanying consolidated statements of
operations. The management of the Company periodically estimates
the probable tax obligations of the Company using historical
experience in tax jurisdictions and informed judgments. There
are inherent uncertainties related to the interpretation of tax
regulations. The judgments and estimates made at a point in time
may change based on the outcome of tax audits, as well as
changes to or further interpretations of regulations. If such
changes take place, there is a risk that the tax rate may
increase or decrease in any period.


 




Share-Based
Compensation



 



Effective April 1, 2006, the Company adopted Statement of
Financial Accounting Standards (“SFAS”) No. 123R,
“Share Based Payment,” using the modified prospective
transition method and began accounting for its share-based
compensation using a fair-value based recognition method. Under
the provisions of SFAS No. 123R, share-based
compensation cost is estimated at the grant date based on the
fair value of the award and is expensed ratably over the
requisite service period of the award. Determining the
appropriate fair-value model and calculating the fair value of
share-based awards at the grant date requires considerable
judgment, including estimating stock price volatility and the
expected option life.


 



The Company uses the Black-Scholes option valuation model to
value employee stock options. The Company estimates stock price
volatility based on historical volatility of its common stock.
Estimated option life assumptions are also derived from
historical data. Had the Company used alternative valuation
methodologies and assumptions, compensation cost for share-based
payments could be significantly different. The Company
recognizes compensation expense using the straight-line
amortization method for share-based compensation awards with
graded vesting.





19





Table of Contents







These excerpts taken from the CSS 10-K filed Jun 2, 2008.
Critical Accounting Policies
 
In preparing our consolidated financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. Below are the most significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.


15


 

Revenue
 
Revenue is recognized from product sales when goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably assured. The Company records estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions. In limited cases, the Company may provide the right to return product as part of its customer programs with certain customers. The Company also records estimated reductions to revenue, based primarily on historical experience, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales, and the related reserves are shown as a reduction of accounts receivable, except reserves for customer programs which are shown as a current liability. If the amount of actual customer returns and chargebacks were to increase or decrease significantly from the estimated amount, revisions to the estimated allowance would be required.
 
Accounts Receivable
 
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. While some customers are granted return rights as part of their sales program, customers generally do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. The Company is generally not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company mitigates its exposure to bad debts by evaluating the creditworthiness of its major customers utilizing established credit limits and purchasing credit insurance when appropriate and available. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customer’s creditworthiness, historical recovery percentages and outstanding customer deductions and program arrangements.
 
Inventory Valuation
 
Inventories are valued at the lower of cost or market. Cost is primarily determined by the first-in, first-out method although certain inventories are valued based on the last-in, first-out method. The Company writes down its inventory for estimated obsolescence in an amount equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts. Additional inventory write downs could result from unanticipated additional carryover of finished goods and raw materials, or from lower proceeds offered by parties in our traditional closeout channels.
 
Goodwill
 
Goodwill is subject to an assessment for impairment using a two-step fair value-based test, the first step of which must be performed at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. The first step compares the fair value of a reporting unit to its carrying amount, including goodwill. For each of the reporting units, the estimated fair value is determined utilizing a multiple of earnings before interest, income taxes, depreciation and amortization. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the implied fair value of the goodwill. If the implied fair value of goodwill is less than the carrying amount of the goodwill, an impairment loss would be reported.
 
Accounting for Income Taxes
 
As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax expense (state, federal and foreign), including the impact of permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant and equipment, and valuation of inventories. Temporary differences and operating loss and credit carryforwards result in deferred tax assets and liabilities, which


16


 

are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase such allowance in a period, we would record additional tax expense in the accompanying consolidated statements of operations. The management of the Company periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period.
 
Share-Based Compensation
 
Effective April 1, 2006, the Company adopted SFAS No. 123R, using the modified prospective transition method and began accounting for its share-based compensation using a fair-value based recognition method. Under the provisions of SFAS No. 123R, share-based compensation cost is estimated at the grant date based on the fair value of the award and is expensed ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the grant date requires considerable judgment, including estimating stock price volatility, and the expected option life.
 
The Company uses the Black-Scholes option valuation model to value employee stock awards. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life assumptions are also derived from historical data. The Company recognizes compensation expense using the straight-line amortization method for share-based compensation awards with graded vesting. Had the Company used alternative valuation methodologies and assumptions, compensation cost for share-based payments could be significantly different.
 
Critical
Accounting Policies



 



In preparing our consolidated financial statements, management
is required to make estimates and assumptions that, among other
things, affect the reported amounts of assets, liabilities,
revenue and expenses. These estimates and assumptions are most
significant where they involve levels of subjectivity and
judgment necessary to account for highly uncertain matters or
matters susceptible to change, and where they can have a
material impact on our financial condition and operating
performance. Below are the most significant estimates and
related assumptions used in the preparation of our consolidated
financial statements. If actual results were to differ
materially from the estimates made, the reported results could
be materially affected.





15





 







Revenue


 



Revenue is recognized from product sales when goods are shipped,
title and risk of loss have been transferred to the customer and
collection is reasonably assured. The Company records estimated
reductions to revenue for customer programs, which may include
special pricing agreements for specific customers, volume
incentives and other promotions. In limited cases, the Company
may provide the right to return product as part of its customer
programs with certain customers. The Company also records
estimated reductions to revenue, based primarily on historical
experience, for customer returns and chargebacks that may arise
as a result of shipping errors, product damaged in transit or
for other reasons that become known subsequent to recognizing
the revenue. These provisions are recorded in the period that
the related sale is recognized and are reflected as a reduction
from gross sales, and the related reserves are shown as a
reduction of accounts receivable, except reserves for customer
programs which are shown as a current liability. If the amount
of actual customer returns and chargebacks were to increase or
decrease significantly from the estimated amount, revisions to
the estimated allowance would be required.


 




Accounts
Receivable



 



The Company offers seasonal dating programs related to certain
seasonal product offerings pursuant to which customers that
qualify for such programs are offered extended payment terms.
While some customers are granted return rights as part of their
sales program, customers generally do not have the right to
return product except for reasons the Company believes are
typical of our industry, including damaged goods, shipping
errors or similar occurrences. The Company is generally not
required to repurchase products from its customers, nor does the
Company have any regular practice of doing so. In addition, the
Company mitigates its exposure to bad debts by evaluating the
creditworthiness of its major customers utilizing established
credit limits and purchasing credit insurance when appropriate
and available. Bad debt and returns and allowances reserves are
recorded as an offset to accounts receivable while reserves for
customer programs are recorded as accrued liabilities. The
Company evaluates accounts receivable related reserves and
accruals monthly by specifically reviewing customer’s
creditworthiness, historical recovery percentages and
outstanding customer deductions and program arrangements.


 




Inventory
Valuation



 



Inventories are valued at the lower of cost or market. Cost is
primarily determined by the
first-in,
first-out method although certain inventories are valued based
on the
last-in,
first-out method. The Company writes down its inventory for
estimated obsolescence in an amount equal to the difference
between the cost of the inventory and the estimated market value
based upon assumptions about future demand, market conditions,
customer planograms and sales forecasts. Additional inventory
write downs could result from unanticipated additional carryover
of finished goods and raw materials, or from lower proceeds
offered by parties in our traditional closeout channels.


 




Goodwill


 



Goodwill is subject to an assessment for impairment using a
two-step fair value-based test, the first step of which must be
performed at least annually, or more frequently if events or
circumstances indicate that goodwill might be impaired. The
first step compares the fair value of a reporting unit to its
carrying amount, including goodwill. For each of the reporting
units, the estimated fair value is determined utilizing a
multiple of earnings before interest, income taxes, depreciation
and amortization. If the carrying amount of the reporting unit
exceeds its fair value, the second step is performed. The second
step compares the carrying amount of the goodwill to the implied
fair value of the goodwill. If the implied fair value of
goodwill is less than the carrying amount of the goodwill, an
impairment loss would be reported.


 




Accounting
for Income Taxes



 



As part of the process of preparing our consolidated financial
statements, we are required to estimate our actual current tax
expense (state, federal and foreign), including the impact of
permanent and temporary differences resulting from differing
bases and treatment of items for tax and accounting purposes,
such as the carrying value of intangibles, deductibility of
expenses, depreciation of property, plant and equipment, and
valuation of inventories. Temporary differences and operating
loss and credit carryforwards result in deferred tax assets and
liabilities, which





16





 






are included within our consolidated balance sheets. We must
then assess the likelihood that our deferred tax assets will be
recovered from future taxable income. Actual results could
differ from this assessment if sufficient taxable income is not
generated in future periods. To the extent we determine the need
to establish a valuation allowance or increase such allowance in
a period, we would record additional tax expense in the
accompanying consolidated statements of operations. The
management of the Company periodically estimates the probable
tax obligations of the Company using historical experience in
tax jurisdictions and informed judgments. There are inherent
uncertainties related to the interpretation of tax regulations.
The judgments and estimates made at a point in time may change
based on the outcome of tax audits, as well as changes to or
further interpretations of regulations. If such changes take
place, there is a risk that the tax rate may increase or
decrease in any period.


 




Share-Based
Compensation



 



Effective April 1, 2006, the Company adopted
SFAS No. 123R, using the modified prospective
transition method and began accounting for its share-based
compensation using a fair-value based recognition method. Under
the provisions of SFAS No. 123R, share-based
compensation cost is estimated at the grant date based on the
fair value of the award and is expensed ratably over the
requisite service period of the award. Determining the
appropriate fair-value model and calculating the fair value of
share-based awards at the grant date requires considerable
judgment, including estimating stock price volatility, and the
expected option life.


 



The Company uses the Black-Scholes option valuation model to
value employee stock awards. The Company estimates stock price
volatility based on historical volatility of its common stock.
Estimated option life assumptions are also derived from
historical data. The Company recognizes compensation expense
using the straight-line amortization method for share-based
compensation awards with graded vesting. Had the Company used
alternative valuation methodologies and assumptions,
compensation cost for share-based payments could be
significantly different.


 




This excerpt taken from the CSS 10-K filed Jun 5, 2007.
Critical Accounting Policies
 
In preparing our consolidated financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts of assets, revenue and expenses. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our


15


Table of Contents

financial condition and operating performance. Below are the most significant estimates and related assumptions used in the preparation of our consolidated financial statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected.
 
Revenue
 
Revenue is recognized from product sales when goods are shipped, title and risk of loss have been transferred to the customer and collection is reasonably assured. The Company records estimated reductions to revenue for customer programs, which may include special pricing agreements for specific customers, volume incentives and other promotions. The Company also records estimated reductions to revenue, based primarily on historical experience, for customer returns and chargebacks that may arise as a result of shipping errors, product damaged in transit or for other reasons that become known subsequent to recognizing the revenue. These provisions are recorded in the period that the related sale is recognized and are reflected as a reduction from gross sales and the related reserves are shown as a reduction of accounts receivable, except reserves for customer programs which are shown as a current liability. If the amount of actual customer returns and chargebacks were to increase or decrease significantly from the estimated amount, revisions to the estimated allowance would be required.
 
Accounts Receivable
 
The Company offers seasonal dating programs related to certain seasonal product offerings pursuant to which customers that qualify for such programs are offered extended payment terms. Customers generally do not have the right to return product except for reasons the Company believes are typical of our industry, including damaged goods, shipping errors or similar occurrences. With few exceptions, the Company is not required to repurchase products from its customers, nor does the Company have any regular practice of doing so. In addition, the Company mitigates its exposure to bad debts by evaluating the creditworthiness of its major customers utilizing established credit limits and purchasing credit insurance when appropriate and available. Bad debt and returns and allowances reserves are recorded as an offset to accounts receivable while reserves for customer programs are recorded as accrued liabilities. The Company evaluates accounts receivable related reserves and accruals monthly by specifically reviewing customer’s creditworthiness, historical recovery percentages and outstanding customer program arrangements.
 
Inventory Valuation
 
Inventories are valued at the lower of cost or market. Cost is primarily determined by the first-in, first-out method although certain inventories are valued based on the last-in, first-out method. The Company writes down its inventory for estimated obsolescence in an amount equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand, market conditions, customer planograms and sales forecasts. Additional inventory write downs could result from unanticipated additional carryover of finished goods and raw materials, or from lower proceeds offered by parties in our traditional closeout channels.
 
Goodwill
 
Goodwill is subject to an assessment for impairment using a two-step fair value-based test, the first step of which must be performed at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. The first step compares the fair value of a reporting unit to its carrying amount, including goodwill. For each of the reporting units, the estimated fair value is determined utilizing a multiple of earnings before interest, income taxes, depreciation and amortization. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the goodwill to the implied fair value of the goodwill. If the implied fair value of goodwill is less than the carrying amount of the goodwill, an impairment loss would be reported.
 
Accounting for Income Taxes
 
As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax expense (state, federal and foreign), including the impact of permanent and temporary differences


16


Table of Contents

resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant and equipment, and valuation of inventories. Temporary differences and operating loss and credit carryforwards result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if sufficient taxable income is not generated in future periods. To the extent we determine the need to establish a valuation allowance or increase such allowance in a period, we would record additional tax expense in the accompanying consolidated statements of operations. The management of the Company periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period.
 
Share-Based Compensation
 
Effective April 1, 2006, the Company adopted SFAS No. 123R, using the modified prospective transition method and began accounting for its share-based compensation using a fair-value based recognition method. Under the provisions of SFAS No. 123R, share-based compensation cost is estimated at the grant date based on the fair value of the award and is expensed ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the grant date requires considerable judgment, including estimating stock price volatility, and the expected option life.
 
The Company uses the Black-Scholes option valuation model to value employee stock awards. The Company estimates stock price volatility based on historical volatility of its common stock. Estimated option life assumptions are also derived from historical data. The Company recognizes compensation expense using the straight-line amortization method for share-based compensation awards with graded vesting. Had the Company used alternative valuation methodologies and assumptions, compensation cost for share-based payments could be significantly different.
 
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