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Note 1 - Description of Business and Summary of Significant Accounting Policies
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Oct. 31, 2012
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| Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block] |
1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description
of business. Unless the context indicates
otherwise, references to “SHFL
entertainment, Inc.,” “we,”
“us,” “our,” or the
“Company,” include SHFL entertainment, Inc.
and its consolidated subsidiaries. The Company was previously
known as Shuffle Master, Inc. and changed its name in the
current year to SHFL entertainment, Inc.
We
are a leading global gaming supplier committed to making
gaming more fun for players and more profitable for operators
through product innovation, and superior quality and
service. We operate in legalized gaming markets
across the globe and provide state-of-the-art, value-add
products in four distinct segments: Utility products, which
include automatic card shufflers and roulette chip sorters;
Proprietary Table Games (“PTG”), which include
live table games, side bets and progressives as well as our
newly introduced online gaming products, which feature online
versions of our table games, social gaming and mobile
applications; Electronic Table Systems (“ETS”),
which include various e-Table game platforms; and Electronic
Gaming Machines (“EGM”), which include video slot
machines. Each segment's activities include the
design, development, acquisition, manufacturing, marketing,
distribution, installation and servicing of a distinct
product line. Our products are manufactured at our
headquarters in Las Vegas, Nevada, at our Australian
headquarters in Milperra, New South Wales, Australia, as well
as outsourced, for certain sub-assemblies in the United
States, Europe and Asia.
We
lease, license and sell our products. When we lease or
license our products, we generally negotiate a month-to-month
fixed fee contract. When we sell our products, we offer our
customers a choice between a sale, a longer-term sales-type
lease or other long-term financing. We offer our products
worldwide in regulated markets.
Utility. Our
Utility segment develops products for licensed casino
operators that enhance table game speed, productivity,
profitability and security. Utility products include various
models of automatic card shufflers to suit specific games, as
well as deck checkers, and roulette chip sorters. This
segment also includes our i-Shoe
Auto card reading shoe that gathers data and enables casinos
to track table game play and our i-Score
baccarat viewer that displays current game results and
trends. These products are intended to cost-effectively
provide licensed casino operators and other users with data
on table game play for security and marketing purposes, which
in turn allows them to increase their profitability.
Proprietary
Table Games. Our PTG segment consists of
proprietary table games that enhance our casino customers'
and other licensed operators' table game operations. Products
in this segment include our internally developed and acquired
proprietary table games, side bets, add-ons and progressives
as well as our newly introduced online gaming products, which
feature online versions of our table games, social gaming and
mobile applications. Our proprietary content and
features are also added to public domain games such as poker,
baccarat, pai gow poker, craps and blackjack table games and
to electronic platforms such as Table
Master, Vegas Star
and i-Table.
Electronic
Table Systems. Our ETS segment consists of
various products involving popular table game content using
e-Table game platforms. Our primary ETS products are i-Table,
Table
Master, Vegas Star
and Rapid
Table Games. Our i-Table
platform combines an electronic betting interface with a live
dealer and live cards or a live wheel that is designed to
improve game speed and security while reducing many operating
expenses associated with live tables. Our Table
Master and Vegas Star
products feature a virtual dealer which enables us to offer
table game content in both traditional gaming markets and in
markets where live table games are not permitted, such as
some racinos, video lottery and arcade markets. Like the
i-Table,
our Rapid
Table Games product enables the automation of certain
components of traditional table games such as data
collection, placement of bets, collection of losing bets and
payment of winning bets combined with live dealer and game
outcomes. This automation provides benefits to both casino
operators and players, including greater security and faster
speed of play. Unlike the i-Table,
Rapid Table
Games is not confined to a fixed number of seats and
can have hundreds of terminals tied to one game
outcome.
Electronic
Gaming Machines. Our
EGM segment develops and delivers our video slot machines
into markets including Australia, New Zealand, Asia, Mexico
and parts of South America. We offer a selection
of video slot titles developed as stand-alone units or as
linked progressive machines. In addition to selling the full
EGM complement, we sell software conversion kits that allow
existing EGM terminals to be converted to other games that
operate on the current PC4 operating platform. Popular titles
for our EGMs include Cats Hats &
Bats, Eureka Gold Mine
2, 88
Fortunes, Emerald
Fortunes and Mahajanga. In
addition, we continue to develop a popular range of games
utilizing the Pink Panther™
brand, under license from Metro-Goldwyn-Mayer Studios,
Inc. In late fiscal 2012, we released a range of
games incorporating features and bonus rounds based on the
popular 1960’s animated television series, The
FlintstonesTM
& © Hanna-Barbera s12.
Principles
of consolidation. Our consolidated financial
statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission
(“SEC”) and in accordance with accounting
principles generally accepted in the United States
(“U.S. GAAP”) and include all adjustments
necessary to fairly present our consolidated results of
operations, financial position and cash flows for each period
presented.
Our
consolidated financial statements include the accounts of
SHFL entertainment, Inc. and our wholly-owned domestic and
foreign subsidiaries. All inter-company accounts and
transactions have been eliminated. We have no unconsolidated
subsidiaries.
Reclassification.
The Company revised its October 31, 2011, consolidated
balance sheet to appropriately classify amounts that were
previously included within accounts receivable as current
investment in sales-type leases and notes receivable. This
revision resulted in a $3.2 million increase in the
current investment in sales-type leases and notes receivable
with a corresponding reduction to accounts receivable. The
revision, which the Company determined was not material, had
no impact on total current assets, results of operations or
cash flows.
Use
of estimates and assumptions. The preparation of our
consolidated financial statements in conformity with U.S.
GAAP requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting
periods. Significant estimates and assumptions are used for,
but not limited to: (1) revenue recognition including the
assessment of collectability and multiple element
arrangements; (2) allowance for doubtful accounts; (3)
asset impairments, including determination of the fair value
of goodwill and indefinite lived trade names; (4) depreciable
lives of assets; (5) useful lives and amortization of
intangible assets; (6) income tax valuation allowances and
uncertain tax positions; (7) fair value of stock options; and
(8) the need for contingency and litigation reserves. Future
events and their effects cannot be predicted with certainty;
accordingly, our accounting estimates require the exercise of
judgment. The accounting estimates used in the preparation of
our consolidated financial statements will change as new
events occur, as more experience is acquired, as additional
information is obtained and as our operating environment
changes. We evaluate and update our assumptions and estimates
on an ongoing basis. Actual results could differ from those
estimates.
Concentration
of credit risk. Our financial instruments that have
potential concentrations of credit risk include cash and cash
equivalents, accounts receivable, investments in sales-type
leases and notes receivable. We maintain cash balances that
exceed federally insured limits; however, we have incurred no
losses on such accounts. Accounts receivable, investments in
sales-type leases and notes receivable have concentration of
credit risk because they all relate to our customers in the
gaming industry. We generally grant customers
credit terms for periods of 30 to 90 days or may grant
extended credit terms, with interest at prevailing
rates. Notes receivable are generally
collateralized by the related equipment sold, although the
value of such equipment, if repossessed, may be less than the
receivable balance outstanding and the ability to actually
repossess the equipment may not always be undisputed or able
to be effectively executed.
From
time to time, we make significant sales to customers that
exceed 10% of our then-outstanding accounts receivable
balance. As of October 31, 2012 and 2011, no customer balance
exceeded 10% of our net trade accounts receivable. As of
October 31, 2012 one customer exceeded 10% of our net
investment in sales-type lease and notes
receivable. As of October 31, 2011, no customer
balance exceeded 10% of our net investment in sales-type
lease and notes receivable. For the fiscal years ended 2012,
2011 and 2010, no individual customer accounted for more than
10% of consolidated revenue.
Inventories. Inventories
are stated at the lower of cost, determined on a
first-in-first-out basis, or market. Cost elements
included in work-in-process and finished goods include raw
materials, direct labor and manufacturing overhead. We
regularly review inventory quantities and update estimates
for the net realizable value of inventories. This process
includes examining the carrying values of new and used gaming
devices, parts and ancillary equipment in comparison to the
current fair market values for such equipment (less costs to
sell or dispose). Some of the factors involved in this
analysis include the overall levels of our inventories, the
current and projected sales levels for such products, the
projected markets for such products, the costs required to
sell the products, including refurbishment costs and
importation costs for international shipments and the overall
projected demand for products once the next generation of
products are scheduled for release.
As
a result of our ongoing analysis of inventory, we recognized
inventory write-downs of approximately $0.02 million, $1.1
million and $1.0 million for fiscal years 2012, 2011 and
2010, respectively. Additional valuation charges
could occur in the future as a result of changes in the
factors listed above.
Products
leased and held for lease. Our products are primarily
leased to customers pursuant to month-to-month fixed fee
contracts and to a lesser extent through participation
arrangements whereby casinos pay a fee to us based on a
percentage of net win. Products leased and held for lease are
stated at cost, net of depreciation. Depreciation on leased
products is calculated using the straight-line method over
the estimated useful life of three to five years. We provide
maintenance of our products on lease as part of our standard
lease agreements.
Property
and equipment. Property and equipment is stated at
cost. Depreciation is recorded using the straight-line method
over the estimated useful life or lease terms, if shorter,
for leasehold improvements. Depreciation
attributable to manufacturing operations is included in cost
of sales and service. The remaining component of
depreciation is included in selling, general and
administrative expenses.
We
also review these assets for impairment whenever events or
circumstances indicate the carrying value may not be
recoverable or warrant a revision to the estimated remaining
useful life.
Goodwill
and other indefinite lived intangible assets. We do
not renew or extend the term of our intangible assets. We
review our goodwill for impairment annually in October or
when circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying
amount. The goodwill impairment analysis may start
with an assessment of qualitative factors to determine
whether it is more likely than not that the fair value of a
reporting unit is less than its carrying
amount. If, after assessing the qualitative
factors, we determine that it is more likely than not that
the fair value of a reporting unit is less than its carrying
amount, or if we do not perform a qualitative assessment, we
will perform a two-part impairment test. In the
first step, we use a discounted cash flow model (income
approach) and the Guideline Public Company Model (market
approach) to assess the fair values of our reporting units,
which are the same as our operating
segments. These two methodologies are weighted
equally to determine the reportable segment fair
value. The fair value of the reporting unit is
then compared to the book value of the reporting unit,
including its goodwill. If the fair value of the reporting
unit is greater than its carrying amount, goodwill is not
considered impaired. If the fair value is less
than the book value, we perform a second step to compare the
implied fair value of the reporting unit’s goodwill to
its book value. The implied fair value of the goodwill is
determined based on the estimated fair value of the reporting
unit less the fair value of the reporting unit’s
identifiable assets and liabilities. We record an impairment
charge to the extent that the book value of the reporting
unit’s goodwill exceeds its fair value.
Our
income approach analysis is based on the present value of two
components: the sum of our five-year projected cash flows and
a terminal value assuming a long-term growth rate. The cash
flow estimates are prepared based on our business plans for
each reporting unit, considering historical results and
anticipated future performance based on our expectations
regarding product introductions and market opportunities. The
discount rates used to determine the present value of future
cash flows are derived from the weighted average cost of
capital of a group of comparable companies with consideration
for the size and specific risks of each our reporting
units.
As
of October 31, 2012 and 2011, our goodwill totaled $85.0
million and $85.4 million, respectively. For the Utility, PTG
and EGM reporting units our fiscal 2012 annual goodwill
impairment analysis included an assessment of certain
qualitative factors including, but not limited to, the
results of the prior year fair value calculation, the
movement of our share price and market capitalization,
overall financial performance, and macro-economic and
industry conditions. We considered the qualitative
factors and weighted the evidence obtained and determined
that it is not more likely than not that the fair value of
any reporting unit is less than its carrying
amount. In 2011 we adopted new accounting guidance
and performed an assessment of qualitative factors similar to
that described above and determined that it was not more
likely than not that the fair value of any reporting unit was
less than its carrying amount. In fiscal 2010 we
performed the first step test required under previous
guidance using an income approach and market approach and the
results of that valuation indicated that each of these
reporting units’ fair values were significantly higher
than their carrying values. We used a discount
rate of 12.5% in the 2010 test and if we had increased the
discount rate to 13.5% (all other assumptions held constant)
the fair value of each reporting unit would have still
exceeded its carrying value by at least 43%.
For
the ETS reporting unit for fiscal 2012 we performed the
two-part analysis described above. We used a
discount rate of 14% and if we had increased the discount
rate to 15% (all other assumptions held constant) the fair
value of the reporting unit would have still exceeded its
carrying value by 13%. In the Guideline Public
Company Method we selected moderately lower multiples than
the average of our peer companies and applied these multiples
to our trailing twelve months revenue, projected 2013
revenue, and 2013 EBITDA. We weighted these
multiples according to our judgment regarding the importance
of each multiple as an indicator of value.
Although
we believe the qualitative factors considered in the
impairment analysis are reasonable, significant changes in
any one of our assumptions could produce a significantly
different result. If our quantitative assumptions
do not prove correct or economic conditions affecting future
operations change, our goodwill could become impaired and
result in a material adverse effect on our results of
operations and financial position. For fiscal 2012, 2011 and
2010, we did not have any goodwill impairment
loss.
In
the current year we adopted a new Accounting Standards Update
(“ASU”) issued by the Financial Accounting
Standards Board (“FASB”) that allows for the
indefinite lived intangible asset impairment analysis to
start with an assessment of qualitative factors to determine
whether it is more likely than not that the fair value of
indefinite lived assets are less than their carrying
amounts. If, after assessing the qualitative
factors, we determine that it is more likely than not that
our indefinite lived intangible assets are less than their
carrying amounts, then we perform an impairment
test. The impairment test consists of selecting
the relief from royalty model (income approach) to assess the
fair value of our indefinite lived intangibles. If
the carrying amount of the indefinite lived intangibles
exceeds its fair value, we recognize an impairment loss in an
amount equal to that excess.
Our
relief from royalty analysis is based on the projected
revenue attributable to the asset, expected economic life of
the asset, present value of the royalty rate (as a percentage
of revenue) that would hypothetically be charged by a
licensor of the asset to an unrelated licensee, and the
discount rate that reflects the level of risk associated with
receiving future cash flows attributable to the
asset. The model estimates are prepared based on
our business plans for each trade name, considering
historical results and anticipated future performance and
market opportunities. The discount rates used to determine
the present value of future cash flows would be derived from
our weighted average cost of capital adjusted for asset
specific premiums (if any).
As
of October 31, 2012 and 2011, our indefinite lived intangible
assets totaled $24.5 million and $25.5 million, respectively.
Our fiscal 2012 annual indefinite lived intangible asset
impairment analysis included an assessment of certain
qualitative factors including, but not limited to, the
results of the prior year fair value calculation, overall
financial performance, and macro-economic and industry
conditions. We considered the qualitative factors
and determined that it is not more likely than not that the
fair value of the indefinite lived intangible assets are less
than their carrying amounts. In the prior year we performed
the quantitative test required under previous guidance using
the relief from royalty method and the results of that
valuation indicated that the fair values of our indefinite
lived intangible assets were significantly higher than their
carrying values. The discount rate used for each
trade name was 12.5% for our fiscal 2011. The
pre-tax royalty rate used for each trade name was 4.0% for
fiscal 2011. If we had increased the discount rate
to 13.5% (all other assumptions held constant) the fair value
of each trade name would have still exceeded its carrying
value by at least 57%.
Although
we believe the qualitative factors considered in the
impairment analysis are reasonable, significant changes in
any one of our assumptions could produce a significantly
different result. If our assumptions do not prove correct or
economic conditions affecting future operations change, our
indefinite lived intangible assets could become impaired and
result in a material adverse effect on our results of
operations and financial position.
For
fiscal 2012, 2011 and 2010 we did not have any indefinite
lived intangible asset impairment loss.
Other
intangible assets. Other intangible assets include
intellectual property for games, patents, trademarks,
copyrights, licenses, developed technology, customer
relationships and non-compete agreements that were purchased
separately or acquired in connection with a business
combination. All of our significant other intangible assets
have finite useful lives and are amortized as the economic
benefits of the intangible asset are consumed or otherwise
used up. Amortization of customer relationships and
non-compete agreements is included in selling, general and
administrative expense and the remaining components of
amortization are included in cost of sales and service and
cost of leases and royalties.
Impairment
of long-lived assets. We estimate the useful lives of
our long-lived assets, excluding goodwill and indefinite
lived intangible assets, based on historical experience,
estimates of products' commercial lives, the likelihood of
technological obsolescence and estimates of the duration of
commercial viability for patents, licenses and games.
We
review our long-lived assets, excluding goodwill and
indefinite lived intangible assets, for impairment whenever
events or changes in circumstances indicate the carrying
value may not be recoverable or warrant a revision to the
estimated remaining useful life. Such events or
circumstances include, but are not limited to, a significant
decrease in the fair value of the underlying business or
market price of the long-lived asset, a significant adverse
change in legal factors or business climate that could affect
the value of a long-lived asset, or a current period
operating or cash flow loss combined with a history of
operating or cash flow losses. We group long-lived
assets for impairment analysis at the lowest level for which
identifiable cash flows are largely independent of the cash
flows of other assets and liabilities.
Recoverability
of the carrying amount of long-lived assets is measured by
comparing the carrying amount to the estimated future
undiscounted net cash flows that the assets are expected to
generate. Those cash flows include an estimated terminal
value based on a hypothetical sale at the end of the assets'
depreciation period. Estimating these cash flows and terminal
values requires management to make judgments about the growth
in demand for our products and sustainability of gross
margins. If assets are considered to be impaired, the
impairment to be recognized is measured as the amount by
which the carrying amount of the long-lived asset exceeds its
fair value. For fiscal 2012, 2011 and 2010, we
did not have any such impairment loss.
Deferred
revenue. Deferred revenue consists of amounts
collected or billed in excess of recognizable revenue.
Revenue
recognition. We recognize revenues when all of the
following have been satisfied:
Revenues
are reported net of incentive rebates and discounts. Amounts
billed prior to completing the earnings process are deferred
until revenue recognition criteria are met. Our standard
sales contracts do not contain right of return provisions and
we have not experienced significant sales
returns. Therefore we have not recorded an
allowance for sales returns.
Product lease
and royalty revenue — Lease and royalty revenue
is earned from the leasing of our tangible products and the
licensing of our intangible products, such as our proprietary
table games. When we lease or license our products, we
generally negotiate month-to-month fixed fee contracts, or to
a lesser extent, enter into participation arrangements
whereby casinos pay a fee to us based on a percentage of net
win. Lease and royalty revenue commences
upon the completed installation of the product. Lease terms
are generally cancellable with 30 days’ notice.
We recognize revenue from our leases and licenses upon
installation of our product on a month-to-month basis.
Product sales
and service revenue — We generate sales revenue
through the sale of equipment in each product segment,
including sales revenue from sales-type leases and the sale
of lifetime licenses for our proprietary table games. Our
credit sales terms are primarily 30 to 90
days. Financing for intangible property and
sales-type leases for tangible property have payment terms
ranging generally from 24 to 36 months and are usually
interest-bearing at market interest rates. Revenue from the
sale of equipment is recorded in accordance with the
contractual shipping terms. Products placed with customers on
a trial basis are not recognized as revenue until the trial
period ends, the customer accepts the product and all other
relevant criteria have been met. If a customer purchases
existing leased equipment, revenue is recorded on the
effective date of the purchase agreement. Revenue on service
and warranty contracts is recognized as the services are
provided over the term of the contracts. Revenue from the
sale of lifetime licenses, under which we have no continuing
obligation, is recorded on the effective date of the license
agreement.
Multiple element
arrangements — Some of our revenue arrangements
contain multiple deliverables, such as a product sale
combined with a service element or the delivery of a future
product. We allocate revenues among multiple
deliverables in a multi-element arrangement, based on
relative selling prices. In order of preference, relative
selling prices will be estimated based on vendor specific
objective evidence (“VSOE”), third-party evidence
(“TPE”), or management’s best estimate of
selling price (“BESP”).
When
VSOE or TPE is not available, BESP is the amount we would
sell the product or service for individually. The
determination of BESP is made based on our normal pricing and
discounting practices, which consider multiple factors, such
as market conditions, competitive landscape, internal costs
and profit objectives. Revenues allocated to
future performance obligations elements are deferred and will
be recognized upon delivery and customer acceptance.
Income
taxes. We record deferred tax assets and
liabilities based on temporary differences between the
financial reporting and tax bases of assets and liabilities,
applying enacted tax rates expected to be in effect for the
year in which the differences are expected to
reverse. We reduce deferred tax assets by a
valuation allowance when it is more likely than not that some
or all of the deferred tax assets will not be
realized.
Our
provision for income taxes includes interest and penalties
related to uncertain tax positions. We only recognize the tax
benefit from an uncertain tax position if it is more likely
than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the
financial statements from such positions are then measured
based on the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement.
Share
based compensation. We measure and
recognize all share-based compensation, including restricted
shares and share-based awards to employees, under the fair
value method. We measure the fair value of
share-based awards using the Black-Scholes model and
restricted shares using the grant date fair value of the
stock.
Compensation
is attributed to the periods of associated service and such
expense is recognized on a straight-line basis over the
vesting period of the awards. Forfeitures are estimated at
the time of grant, with such estimate updated when the
expected forfeiture rate changes.
In
addition, the excess tax benefit from stock-option
exercises—tax deductions in excess of compensation cost
recognized—is classified as a financing
activity.
Contingencies.
We assess our exposures to loss contingencies and provide for
an exposure if it is judged to be probable and reasonably
estimable. If the actual loss from a contingency differs from
our estimate, there could be a material impact on our results
of operations or financial position. Operating expenses,
including legal fees, associated with contingencies are
expensed when incurred.
Advertising
costs. We expense advertising and promotional costs as
incurred, which totaled approximately $3.4 million, $3.0
million and $2.2 million, for the fiscal years ended October
31, 2012, 2011 and 2010, respectively.
Research
and development costs. We incur research and
development costs to develop our new and next-generation
products. Our products reach technological feasibility
shortly before the products are released and therefore
R&D costs are expensed as incurred. Employee related
costs associated with product development are included in
R&D costs.
Foreign
currency translation. Our foreign subsidiaries' asset
and liability accounts are translated into U.S. dollar
amounts at the exchange rate in effect at the balance sheet
date. Foreign exchange translation adjustments are recorded
as a separate component of shareholders' equity. Revenue and
expense accounts are translated at the average monthly
exchange rates. Inter-company trade balances,
which we anticipate to settle in the foreseeable future,
result in foreign currency gains and losses which are
included in other expenses in our consolidated statements of
operations. Transaction gains and losses are
included in other expense in our consolidated statements of
operations.
Earnings
per common share. Basic earnings per share is
calculated by dividing net income by the weighted average
number of common shares outstanding and issuable during the
year. Diluted earnings per share is similar to basic, except
that the weighted average number of shares outstanding is
increased by the potentially dilutive effect of outstanding
stock options, if applicable, during the year, using the
treasury stock method. Restricted stock granted under our
share-based award plans is included in the earnings per share
calculation and it is considered a participating security
because it carries non-forfeitable rights to
dividends.
Cash
and cash equivalents. Cash and cash equivalents
include short-term investments with maturities of three
months or less from their date of purchase. We maintain cash
balances that exceed federally insured limits; however, we
have incurred no losses on such accounts. Cash and cash
equivalents at our foreign subsidiaries were $22.5 million as
of October 31, 2012 and $17.5 million as of October 31, 2011
for which we currently plan to reinvest. We
regularly evaluate our cash position in each territory and
look for ways to efficiently deploy capital to markets where
it is most needed.
Receivables,
allowance for doubtful accounts and credit quality of
financing receivables. Accounts receivable is stated
at face value less an allowance for doubtful accounts. We
generally grant customers credit terms for periods of 30 to
90 days. Our investment in sales-type lease receivables
is comprised of contracts. These contracts include extended
payment terms granted to qualifying customers for periods
from one to three years and are secured by the related
products sold.
We
evaluate the credit quality of the receivables and establish
an allowance for doubtful accounts based primarily upon
collection history, using a combination of factors
including, but not limited to, customer collection
experience, economic conditions, and the customer’s
financial condition. In addition to specific account
identification, we utilize historic collection
experience, where applicable, to establish an allowance for
doubtful accounts receivable. A specific reserve is allocated
when collectability becomes uncertain due to events and
circumstances, such as bankruptcy and tax or legal issues
that cause an adverse change in a customer’s cash flows
or financial condition. Accounts placed on reserve are
evaluated for probability of collection, which is used to
determine the amount of the specific reserve. All changes in
the net carrying amount of our contracts are recorded as
adjustments to bad debt expense. The allowance for doubtful
accounts related to accounts receivable as of October 31,
2012 and October 31, 2011 was $0.5 million and $0.4 million,
respectively. The allowance for doubtful accounts related to
investment in sales-type leases and notes receivable as of
October 31, 2012 and October 31, 2011 was approximately $0.01
million and $0.05 million, respectively.
Uncollectible
contracts are written off when it is determined that there is
minimal chance of any kind of recovery, such as a customer
property closure, bankruptcy restructuring or finalization,
or other conditions that severely impact a customer’s
ability to repay amounts owed.
Fair
value measurement. The Company applies fair value
accounting for all financial instruments and non-financial
instruments that are recognized or disclosed at fair value in
the financial statements on a recurring basis. The Company
defines fair value as the price that would be received from
selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. When determining the fair
value measurements for financial instruments, which are
required to be recorded at fair value, the Company considers
the principal or most advantageous market in which the
Company would transact and the market-based risk measurements
or assumptions that market participants would use in pricing
the asset or liability, such as risks inherent in valuation
techniques, transfer restrictions and credit risk. Fair value
is estimated by applying the following hierarchy, which
prioritizes the inputs used to measure fair value into three
levels and bases the categorization within the hierarchy upon
the lowest level of input that is available and significant
to the fair value measurement:
This
hierarchy requires us to use observable market data, when
available, and to minimize the use of unobservable inputs
when determining fair value. For some products or in certain
market conditions, observable inputs may not be
available.
In
accordance with the fair value accounting requirements,
companies may choose to measure eligible financial
instruments and certain other items at fair value. The
Company has not elected the fair value option for any
eligible financial instruments.
See
Note 2 for further discussions of the valuations of certain
of our financial instruments.
Recently
issued accounting standards or updates –adopted
Fair value
measurement disclosure. In the current
year, we adopted an Accounting Standards Update
(“ASU”) on how to measure fair value and on what
disclosures to provide about fair value measurements, which
expands disclosure requirements particularly for Level 3
inputs to include following:
Accordingly
we disclosed the information required by this ASU as it
relates to the goodwill valuation analysis for the ETS
segment in the Goodwill and
other indefinite lived intangible assets section
above. We also disclosed the level in the fair
value hierarchy of items not measured at fair value but whose
fair value is disclosed in Note 2 below.
Indefinite lived
Intangible Asset impairment testing. In the
current year, we adopted an ASU to amend and simplify the
rules related to testing indefinite lived intangible assets
other than goodwill for
impairment. The revised guidance allows an entity
to make an initial qualitative evaluation, based on the
entity’s events and circumstances, to determine whether
it is more likely than not that an indefinite lived
intangible asset is impaired. The results of this qualitative
assessment determine whether it is necessary to perform the
currently required annual impairment test.
In
accordance with the ASU, we assessed our intangible assets
with an indefinite life, consisting of the Stargames
and CARD
tradenames and determined that it is not more likely than not
that these indefinite lived assets are impaired and it was
not necessary to perform the annual impairment test.
Recently
issued accounting standards or updates – not yet
adopted
Comprehensive
income. In June 2011, FASB issued an ASU on
presentation of comprehensive income to improve the
comparability, consistency and transparency of financial
reporting and to increase the prominence of items reported in
other comprehensive income. This update changes the
requirements for the presentation of other comprehensive
income, eliminating the option to present components of other
comprehensive income as part of the statement of
stockholders' equity, among other items. The guidance
requires that all non-owner changes in stockholders' equity
be presented in either a single continuous statement of
comprehensive income or in two separate but consecutive
statements.
This
ASU will be effective for our first quarter of fiscal 2013
and as the update only requires a change in presentation, we
do not expect it to have a material impact on our financial
statements.
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