SCKT » Topics » Critical Accounting Policies

These excerpts taken from the SCKT 10-K filed Mar 16, 2009.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our financial statements for the year ended December 31, 2008. The application of these policies requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on a combination of historical experience and reasonable judgment applied to other facts. Actual results may differ from these estimates, and such differences may be material to the financial statements. In addition, the use of different assumptions or judgments may result in different estimates. We believe our critical accounting policies that are subject to these estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, Stock Based-Compensation, and Valuation of Goodwill and Other Intangible Assets.

Revenue Recognition and Accounts Receivable Reserves

We defer revenue recognition on products sold to distributors until our distributors sell the products to their customers, because our distributors generally have rights to return products to us for stock rotation, stock reduction, or replacement of defective product. The amount of deferred revenue net of related cost of revenue is classified as deferred income on shipments to distributors on our balance sheet. We use inventory reports received from our distributors at the end of each reporting period to determine the extent of inventory at the distributor, and thus, the amount of income to defer. Stock rotation and stock reduction from our distributors generally results in a balance sheet adjustment to our deferred income and does not impact our revenue or cost of revenue.

We generally recognize revenues on sales to customers other than distributors upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Most of our customers other than distributors do not have rights of return except under warranty.

We estimate the amount of uncollectible receivables at the end of each reporting period based on the aging of the receivable balance, historical trends, and communications with our customers. If actual bad debts are significantly different from our estimates our operating results will be affected.

Inventory Valuation

Our inventories primarily consist of component parts used to assemble our products after we receive orders from our customers. We purchase or have manufactured the component parts required by our engineering bill of materials. The timing and quantity of our purchases are based on order forecasts, the lead time requirements of our vendors, and on economic order quantities. At the end of each reporting period, we compare our inventory on hand to our forecasted requirements for the next nine-month period, and write off the cost of any inventory that is surplus, less any amounts that we believe we can recover from disposal of goods that we specifically believe will be saleable past a nine-month horizon. Our sales forecasts are based upon historical trends, communications from customers, and marketing data regarding market trends and dynamics, which we discuss in Item 1, Business. Surplus or obsolete inventory can also be created by changes to our engineering bill of materials. Charges for the amounts we record as surplus or obsolete inventory are included in cost of revenue.

 

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Stock-Based Compensation

On January 1, 2006, the Company adopted SFAS 123R for fiscal years ended December 31, 2006 and onward. SFAS 123R requires all share-based awards to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date. Under SFAS 123R, the Company uses a binomial lattice valuation model to estimate the fair value of stock option grants made on or after January 1, 2006. The binomial lattice model incorporates calculations for expected volatility, risk-free interest rates, employee exercise patterns and post-vesting employment termination behavior, and these factors affect the estimate of the fair value of the Company's stock option grants. The fair value of stock option grants outstanding as of the effective date is estimated using the Black-Scholes option pricing model used under SFAS 123. The Company adopted the modified prospective recognition method and implemented the provisions of SFAS 123R beginning with the first quarter of 2006.

Valuation of Goodwill and Other Intangible Assets

We account for goodwill in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Goodwill is tested for impairment at least annually and between annual tests if indicators of potential impairment exist. Also in accordance with SFAS 142, we test goodwill for impairment at the reporting unit level. We have determined it is appropriate to report as a single unit. The fair value of the reporting unit at December 31, 2008 was calculated using the income approach. Under the income approach, the fair value of the reporting unit was calculated by estimating the present value of associated future cash flows. In addition, we also review the market capitalization of the Company in conjunction with our analysis of goodwill impairment. We assess the impairment of certain long-lived assets, including intangible assets with definite useful lives, at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

As of December 31, 2008, in our judgment, there is no impairment of goodwill or intangible assets. Future events could cause us to conclude that impairment indicators exist and that goodwill and intangible assets associated with the acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

 

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Critical Accounting
Policies


Our significant accounting policies
are described in Note 1 to our financial statements for the year ended December
31, 2008. The application of these policies requires us to make estimates and
judgments that affect the reported amount of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
our estimates on a combination of historical experience and reasonable judgment
applied to other facts. Actual results may differ from these estimates, and
such differences may be material to the financial statements. In addition, the
use of different assumptions or judgments may result in different estimates.
We believe our critical accounting policies that are subject to these estimates
are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation,
Stock Based-Compensation, and Valuation of Goodwill and Other Intangible Assets.


Revenue Recognition
and Accounts Receivable Reserves


We defer revenue recognition on
products sold to distributors until our distributors sell the products to their
customers, because our distributors generally have rights to return products
to us for stock rotation, stock reduction, or replacement of defective product.
The amount of deferred revenue net of related cost of revenue is classified
as deferred income on shipments to distributors on our balance sheet. We use
inventory reports received from our distributors at the end of each reporting
period to determine the extent of inventory at the distributor, and thus, the
amount of income to defer. Stock rotation and stock reduction from our distributors
generally results in a balance sheet adjustment to our deferred income and does
not impact our revenue or cost of revenue.


We generally recognize revenues
on sales to customers other than distributors upon shipment provided that persuasive
evidence of a sales arrangement exists, the price is fixed and determinable,
title has transferred, collection of resulting receivables is reasonably assured,
there are no customer acceptance requirements, and there are no remaining significant
obligations. Most of our customers other than distributors do not have rights
of return except under warranty.


We estimate the amount of uncollectible
receivables at the end of each reporting period based on the aging of the receivable
balance, historical trends, and communications with our customers. If actual
bad debts are significantly different from our estimates our operating results
will be affected.


Inventory Valuation


Our inventories primarily consist
of component parts used to assemble our products after we receive orders from
our customers. We purchase or have manufactured the component parts required
by our engineering bill of materials. The timing and quantity of our purchases
are based on order forecasts, the lead time requirements of our vendors, and
on economic order quantities. At the end of each reporting period, we compare
our inventory on hand to our forecasted requirements for the next nine-month
period, and write off the cost of any inventory that is surplus, less any amounts
that we believe we can recover from disposal of goods that we specifically believe
will be saleable past a nine-month horizon. Our sales forecasts are based upon
historical trends, communications from customers, and marketing data regarding
market trends and dynamics, which we discuss in Item 1, Business. Surplus or
obsolete inventory can also be created by changes to our engineering bill of
materials. Charges for the amounts we record as surplus or obsolete inventory
are included in cost of revenue.


 


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of Contents)


Stock-Based Compensation


On January 1, 2006,
the Company adopted SFAS 123R for fiscal years ended December 31, 2006 and onward.
SFAS 123R requires all share-based awards to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. The valuation provisions of SFAS 123R apply to new grants
and to grants that were outstanding as of the effective date. Under SFAS 123R,
the Company uses a binomial lattice valuation model to estimate the fair value
of stock option grants made on or after January 1, 2006. The binomial lattice
model incorporates calculations for expected volatility, risk-free interest
rates, employee exercise patterns and post-vesting employment termination behavior,
and these factors affect the estimate of the fair value of the Company's stock
option grants. The fair value of stock option grants outstanding as of the effective
date is estimated using the Black-Scholes option pricing model used under SFAS
123. The Company adopted the modified prospective recognition method and implemented
the provisions of SFAS 123R beginning with the first quarter of 2006.


Valuation
of Goodwill and Other Intangible Assets


We account for goodwill in accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Goodwill is tested for impairment at least
annually and between annual tests if indicators of potential impairment exist.
Also in accordance with SFAS 142, we test goodwill for impairment at the reporting
unit level. We have determined it is appropriate to report as a single unit.
The fair value of the reporting unit at December 31, 2008 was calculated using
the income approach. Under the income approach, the fair value of the reporting
unit was calculated by estimating the present value of associated future cash
flows. In addition, we also review the market capitalization of the Company
in conjunction with our analysis of goodwill impairment. We assess the impairment
of certain long-lived assets, including intangible assets with definite useful
lives, at least annually and whenever events or changes in circumstances indicate
that the carrying value may not be recoverable.


As of December 31, 2008, in our
judgment, there is no impairment of goodwill or intangible assets. Future events
could cause us to conclude that impairment indicators exist and that goodwill
and intangible assets associated with the acquired businesses are impaired.
Any resulting impairment loss could have a material adverse impact on our financial
condition and results of operations.


 


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(Table
of Contents)


These excerpts taken from the SCKT 10-K filed Mar 7, 2008.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our consolidated financial statements for the year ended December 31, 2007. The application of these policies requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on a combination of historical experience and reasonable judgment applied to other facts. Actual results may differ from these estimates, and such differences may be material to the financial statements. In addition, the use of different assumptions or judgments may result in different estimates. We believe our critical accounting policies that are subject to these estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, and Valuation of Goodwill and Other Intangible Assets.

Revenue Recognition and Accounts Receivable Reserves

We defer revenue recognition on products sold to distributors until our distributors sell the products to their customers, because our distributors generally have rights to return products to us for stock rotation, stock reduction, or replacement of defective product. The amount of deferred revenue net of related cost of revenue is classified as deferred income on shipments to distributors on our balance sheet. We use inventory reports received from our distributors at the end of each reporting period to determine the extent of inventory at the distributor, and thus, the amount of income to defer. Stock rotation and stock reduction from our distributors generally results in a balance sheet adjustment to our deferred income and does not impact our revenue or cost of revenue.

We generally recognize revenues on sales to customers other than distributors upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Most of our customers other than distributors do not have rights of return except under warranty.

We estimate the amount of uncollectible receivables at the end of each reporting period based on the aging of the receivable balance, historical trends, and communications with our customers. If actual bad debts are significantly different from our estimates our operating results will be affected.

Inventory Valuation

Our inventories primarily consist of component parts used to assemble our products after we receive orders from our customers. We purchase or have manufactured the component parts required by our engineering bill of materials. The timing and quantity of our purchases are based on order forecasts, the lead time requirements of our vendors, and on economic order quantities. At the end of each reporting period, we compare our inventory on hand to our forecasted requirements for the next nine-month period, and write off the cost of any inventory that is surplus, less any amounts that we believe we can recover from disposal of goods that we specifically believe will be saleable past a nine-month horizon. Our sales forecasts are based upon historical trends, communications from customers, and marketing data regarding market trends and dynamics, which we discuss in Item 1, Business. Surplus or obsolete inventory can also be created by changes to our engineering bill of materials. Charges for the amounts we record as surplus or obsolete inventory are included in cost of revenue.

 

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Valuation of Goodwill and Other Intangible Assets

Our acquisition of the CompactFlash Bluetooth card business, including a product line and technology license, from Nokia Corporation in March 2002 and our acquisition of 3rd Rail Engineering in October 2000 added goodwill and intangible assets to our balance sheet. We allocated the purchase price of each based on an analysis of the fair market value of the assets we acquired. Beginning with the first quarter of 2002, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," we ceased amortizing goodwill, and began to evaluate periodically whether the value of the goodwill was impaired, at which time any impaired balances would be written down. We currently perform an evaluation of goodwill on a quarterly basis. We also evaluate on a quarterly basis our intangible and other long lived assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. In addition, we also review the market capitalization of the Company in conjunction with our analysis of goodwill impairment. As of December 31, 2007, in our judgment, there is no impairment of goodwill or intangible assets. Future events could cause us to conclude that impairment indicators exist and that goodwill and intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Critical Accounting
Policies


Our significant accounting policies are described in Note 1 to our consolidated
financial statements for the year ended December 31, 2007. The application of
these policies requires us to make estimates and judgments that affect the reported
amount of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. We base our estimates on a combination
of historical experience and reasonable judgment applied to other facts. Actual
results may differ from these estimates, and such differences may be material
to the financial statements. In addition, the use of different assumptions or
judgments may result in different estimates. We believe our critical accounting
policies that are subject to these estimates are: Revenue Recognition and Accounts
Receivable Reserves, Inventory Valuation, and Valuation of Goodwill and Other
Intangible Assets.


Revenue Recognition
and Accounts Receivable Reserves


We defer revenue recognition on products sold to distributors until our distributors
sell the products to their customers, because our distributors generally have
rights to return products to us for stock rotation, stock reduction, or replacement
of defective product. The amount of deferred revenue net of related cost of
revenue is classified as deferred income on shipments to distributors on our
balance sheet. We use inventory reports received from our distributors at the
end of each reporting period to determine the extent of inventory at the distributor,
and thus, the amount of income to defer. Stock rotation and stock reduction
from our distributors generally results in a balance sheet adjustment to our
deferred income and does not impact our revenue or cost of revenue.


We generally recognize revenues on sales to customers other than distributors
upon shipment provided that persuasive evidence of a sales arrangement exists,
the price is fixed and determinable, title has transferred, collection of resulting
receivables is reasonably assured, there are no customer acceptance requirements,
and there are no remaining significant obligations. Most of our customers other
than distributors do not have rights of return except under warranty.


We estimate the amount of uncollectible receivables at the end of each reporting
period based on the aging of the receivable balance, historical trends, and
communications with our customers. If actual bad debts are significantly different
from our estimates our operating results will be affected.


Inventory Valuation


Our inventories primarily consist of component parts used to assemble our products
after we receive orders from our customers. We purchase or have manufactured
the component parts required by our engineering bill of materials. The timing
and quantity of our purchases are based on order forecasts, the lead time requirements
of our vendors, and on economic order quantities. At the end of each reporting
period, we compare our inventory on hand to our forecasted requirements for
the next nine-month period, and write off the cost of any inventory that is
surplus, less any amounts that we believe we can recover from disposal of goods
that we specifically believe will be saleable past a nine-month horizon. Our
sales forecasts are based upon historical trends, communications from customers,
and marketing data regarding market trends and dynamics, which we discuss in
Item 1, Business. Surplus or obsolete inventory can also be created by changes
to our engineering bill of materials. Charges for the amounts we record as surplus
or obsolete inventory are included in cost of revenue.


 


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(Table
of Contents)


Valuation
of Goodwill and Other Intangible Assets


Our acquisition of the CompactFlash Bluetooth card business, including a product
line and technology license, from Nokia Corporation in March 2002 and our acquisition
of 3rd Rail Engineering in October 2000 added goodwill and intangible assets
to our balance sheet. We allocated the purchase price of each based on an analysis
of the fair market value of the assets we acquired. Beginning with the first
quarter of 2002, in accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," we ceased amortizing goodwill,
and began to evaluate periodically whether the value of the goodwill was impaired,
at which time any impaired balances would be written down. We currently perform
an evaluation of goodwill on a quarterly basis. We also evaluate on a quarterly
basis our intangible and other long lived assets for potential impairment indicators.
Our judgments regarding the existence of impairment indicators are based on
legal factors, market conditions and operational performance of our acquired
businesses. In addition, we also review the market capitalization of the Company
in conjunction with our analysis of goodwill impairment. As of December 31,
2007, in our judgment, there is no impairment of goodwill or intangible assets.
Future events could cause us to conclude that impairment indicators exist and
that goodwill and intangible assets associated with our acquired businesses
are impaired. Any resulting impairment loss could have a material adverse impact
on our financial condition and results of operations.


This excerpt taken from the SCKT 10-K filed Mar 21, 2007.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our consolidated financial statements for the year ended December 31, 2006. The application of these policies requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on a combination of historical experience and reasonable judgment applied to other facts. Actual results may differ from these estimates, and such differences may be material to the financial statements. In addition, the use of different assumptions or judgments may result in different estimates. We believe our critical accounting policies that are subject to these estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, Valuation of Goodwill and Other Intangible Assets, and beginning on January 1, 2006, Valuation of Compensatory Stock Option Grants.

Revenue Recognition and Accounts Receivable Reserves

We defer revenue recognition on products sold to distributors until our distributors sell the products to their customers, because our distributors generally have rights to return products to us for stock rotation, stock reduction, or replacement of defective product. The amount of deferred revenue net of related cost of revenue is classified as deferred income on shipments to distributors on our balance sheet. We use inventory reports received from our distributors at the end of each reporting period to determine the extent of inventory at the distributor, and thus, the amount of income to defer. Stock rotation and stock reduction from our distributors generally results in a balance sheet adjustment to our deferred income and does not impact our revenue or cost of revenue.

We generally recognize revenues on sales to customers other than distributors upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Most of our customers other than distributors do not have rights of return except under warranty.

We also earn revenues from services performed in connection with consulting arrangements. For those contracts that include contract milestones or acceptance criteria, we recognize revenues as such milestones are achieved or as such acceptance occurs. In some instances the acceptance criteria in the contract defers acceptance until all services are complete and all other elements have been delivered. In these cases, revenue recognition is deferred until those requirements are met.

We estimate the amount of uncollectible receivables at the end of each reporting period based on the aging of the receivable balance, historical trends, and communications with our customers. If actual bad debts are significantly different from our estimates our operating results will be affected.

 

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(Table of Contents)

Inventory Valuation

Our inventories primarily consist of component parts used to assemble our products after we receive orders from our customers. We purchase or have manufactured the component parts required by our engineering bill of materials. The timing and quantity of our purchases are based on order forecasts, the lead time requirements of our vendors, and on economic order quantities. At the end of each reporting period, we compare our inventory on hand to our forecasted requirements for the next nine-month period, and write off the cost of any inventory that is surplus, less any amounts that we believe we can recover from disposal of goods that we specifically believe will be saleable past a nine-month horizon. Our sales forecasts are based upon historical trends, communications from customers, and marketing data regarding market trends and dynamics, which we discuss in Item 1, Business. Surplus or obsolete inventory can also be created by changes to our engineering bill of materials. Charges for the amounts we record as surplus or obsolete inventory are included in cost of revenue.

Goodwill and Other Intangible Assets

Our acquisition of the CompactFlash Bluetooth card business, including a product line and technology license, from Nokia Corporation in March 2002 and our acquisition of 3rd Rail Engineering in October 2000 added goodwill and intangible assets to our balance sheet. We allocated the purchase price of each based on an analysis of the fair market value of the assets we acquired. Beginning with the first quarter of 2002, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," we ceased amortizing goodwill, and began to periodically evaluate whether the value of the goodwill was impaired, at which time any impaired balances would be written down. We periodically evaluate intangible and other long lived assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. In addition, we also review the market capitalization of the Company in conjunction with our analysis of goodwill impairment. As of December 31, 2006, in our judgment, there is no impairment of goodwill or intangible assets. Future events could cause us to conclude that impairment indicators exist and that goodwill and intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Valuation of Compensatory Stock Option Grants

On January 1, 2006, we adopted Financial Accounting Standard SFAS 123R, "Share-Based Payment," for the fiscal year ended December 31, 2006. SFAS 123R requires all share-based awards to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Previously, we accounted for stock option grants to our employees and directors in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) using a Black-Scholes formula, and reported in accordance with the disclosure-only alternative described in SFAS 123, "Accounting for Stock-Based Compensation." The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date. Under SFAS 123R, the Company uses a binomial lattice valuation model to estimate fair value of stock option grants made on or after January 1, 2006. The binomial lattice model incorporates estimates for expected volatility, risk-free interest rates, employee exercise patterns and post-vesting employment termination behavior, and these estimates will affect the calculation of the fair value of the Company's stock option grants. The fair value of stock option grants outstanding as of the effective date is estimated using the Black-Scholes option pricing model used under SFAS 123. The Company adopted the modified prospective recognition method and implemented the provisions of SFAS 123R beginning with the first quarter of 2006.

 

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This excerpt taken from the SCKT 10-K filed Mar 10, 2006.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our consolidated financial statements for the year ended December 31, 2005. The application of these policies requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on a combination of historical experience and reasonable judgment applied to other facts. Actual results may differ from these estimates, and such differences may be material to the financial statements. In addition, the use of different assumptions or judgments may result in different estimates. We believe our critical accounting policies that are subject to these estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, Valuation of Goodwill and Other Intangible Assets, and beginning on January 1, 2006, Valuation of Compensatory Stock Option Grants.

Revenue Recognition and Accounts Receivable Reserves

We defer revenue recognition on products sold to distributors until our distributors sell the products to their customers, because our distributors generally have rights to return products to us for stock rotation, stock reduction, or replacement of defective product. The amount of deferred revenue net of related cost of revenue is classified as deferred income on shipments to distributors on our balance sheet. We use inventory reports received from our distributors at the end of each reporting period to determine the extent of inventory at the distributor, and thus, the amount of income to defer. Stock rotation and stock reduction from our distributors generally results in a balance sheet adjustment to our deferred income and does not impact our revenue or cost of revenue.

We generally recognize revenues on sales to customers other than distributors upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Most of our customers other than distributors do not have rights of return except under warranty.

We also earn revenues from services performed in connection with consulting arrangements. For those contracts that include contract milestones or acceptance criteria, we recognize revenues as such milestones are achieved or as such acceptance occurs. In some instances the acceptance criteria in the contract defers acceptance until all services are complete and all other elements have been delivered. In these cases, revenue recognition is deferred until those requirements are met.

We estimate the amount of uncollectible receivables at the end of each reporting period based on the aging of the receivable balance, historical trends, and communications with our customers. If actual bad debts are significantly different from our estimates our operating results will be affected.

 

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Inventory Valuation

Our inventories primarily consist of component parts used to assemble our products after we receive orders from our customers. We purchase or have manufactured the component parts required by our engineering bill of materials. The timing and quantity of our purchases are based on order forecasts, the lead time requirements of our vendors, and on economic order quantities. At the end of each reporting period, we compare our inventory on hand to our forecasted requirements for the next nine-month period, and write off the cost of any inventory that is surplus, less any amounts that we believe we can recover from disposal of goods that we specifically believe will be saleable past a nine-month horizon. Our sales forecasts are based upon historical trends, communications from customers, and marketing data regarding market trends and dynamics, which we discuss in Item 1, Business. Surplus or obsolete inventory can also be created by changes to our engineering bill of materials. Charges for the amounts we record as surplus or obsolete inventory are included in cost of revenue.

Goodwill and Other Intangible Assets

Our acquisition of the CompactFlash Bluetooth card business, including a product line and technology license, from Nokia Corporation in March 2002 and our acquisition of 3rd Rail Engineering in October 2000 added goodwill and intangible assets to our balance sheet. We allocated the purchase price of each based on an analysis of the fair market value of the assets we acquired. Beginning with the first quarter of 2002, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," we ceased amortizing goodwill, and began to periodically evaluate whether the value of the goodwill was impaired, at which time any impaired balances would be written down. We periodically evaluate intangible and other long lived assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. In addition, we also review the market capitalization of the Company in conjunction with our analysis of goodwill impairment. As of December 31, 2005, in our judgment, there is no impairment of goodwill or intangible assets. Future events could cause us to conclude that impairment indicators exist and that goodwill and intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Valuation of Compensatory Stock Option Grants

On January 1, 2006, we adopted Financial Accounting Standard SFAS 123R, "Share-Based Payment." SFAS 123R requires the valuation of compensatory stock option grants and the expensing of the fair market value of these grants over the vesting period of the grants. Previously, we accounted for stock option grants to our employees and directors in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) using a Black-Scholes formula, and reported in accordance with the disclosure-only alternative described in SFAS 123, "Accounting for Stock-Based Compensation." Under SFAS 123R, we used a binomial lattice valuation model to estimate fair market value of stock options unvested and outstanding on January 1, 2006, and will use this valuation model for future stock option grants made after this date. The binomial lattice model incorporates estimates for expected volatility, risk-free interest rates, employee exercise patterns and post-vesting employment termination behavior, and these estimates will affect the calculation of the fair market value of our stock option grants. We will apply the prospective recognition method and implement the provisions of SFAS 123R beginning in the first quarter of 2006.

 

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This excerpt taken from the SCKT 10-K filed Mar 15, 2005.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our consolidated financial statements for the year ended December 31, 2004. The application of these policies requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on a combination of historical experience and reasonable judgment applied to other facts. Actual results may differ from these estimates and such differences may be material to the financial statements. In addition, the use of different assumptions or judgments may result in different estimates. We believe our critical accounting policies that are subject to these estimates are: Revenue Recognition and Accounts Receivable Reserves, Inventory Valuation, and Valuation of Goodwill and Other Intangible Assets.

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Revenue Recognition and Accounts Receivable Reserves

We defer revenue recognition on products sold to distributors until our distributors sell the products to their customers because our distributors generally have rights to return products to us for stock rotation, stock reduction, or replacement of defective product. The amount of deferred revenue net of related cost of revenue is classified as deferred revenue on our balance sheet. We use inventory reports received from our distributors at the end of each reporting period to determine the extent of inventory at the distributor, and thus, the amount of revenue to defer. Stock rotation and stock reduction from our distributors generally results in a balance sheet adjustment to our deferred revenue and does not impact our revenue or cost of revenue.

We generally recognize revenues on sales to customers other than distributors upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Most of our customers other than distributors do not have rights of return except under warranty.

We also earn revenues from services performed in connection with consulting arrangements. For those contracts that include contract milestones or acceptance criteria, we recognize revenues as such milestones are achieved or as such acceptance occurs. In some instances the acceptance criteria in the contract defers acceptance until all services are complete and all other elements have been delivered. Revenue recognition is deferred until those requirements are met.

We also estimate the amount of uncollectible receivables at the end of each reporting period based on the aging of the receivable balance, historical trends, and communications with our customers. If actual bad debts are significantly different from our estimates our operating results will be affected.

Inventory Valuation

Our inventories primarily consist of component parts used to assemble our connection card products after we receive orders from our customers. We purchase the component parts required by our engineering bill of materials. The timing and quantity of our purchases are based on order forecasts, the lead time requirements of our vendors, and on economic order quantities. At the end of each reporting period, we compare our inventory on hand to our forecasted requirements for the next nine month period, and write-off the cost of any inventory that is surplus, less any amounts that we believe we can recover from disposal of goods that we specifically believe will be saleable past a nine month horizon. Our sales forecasts are based upon historical trends, communications from customers, and marketing data regarding market trends and dynamics, which we discuss in Item 1, Business. Surpluses can also be created by changes to our engineering bill of materials. Charges for the amounts we record as surplus or obsolete inventory are included in cost of revenue.

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Goodwill and Other Intangible Assets

Our acquisition of the CompactFlash Bluetooth card business, including a product line and technology license, from Nokia Corporation in March 2002 and our acquisition of 3rd Rail Engineering in October 2000 added goodwill and intangible assets to our balance sheet. We allocated the purchase price based on an analysis of the fair market value of the assets we acquired. Beginning with the first quarter of 2002, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," we ceased amortizing goodwill, and began to periodically evaluate whether the value of the goodwill was impaired, at which time any impaired balances would be written down. We periodically evaluate intangible and other long lived assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. In addition, we also review the market capitalization of the Company in conjunction with our analysis of goodwill impairment. As of December 31, 2004, in our judgment, there is no impairment of goodwill or intangible assets. Future events could cause us to conclude that impairment indicators exist and that goodwill and intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

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