Nike 2010 Annual Report Download - page 51

Table of Contents
future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial
condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance might be required. In the event we
determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to selling and administrative expense in the period in which
such a determination is made.
Inventory Reserves
We also make ongoing estimates relating to the net realizable value of inventories, based upon our assumptions about future demand and market
conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve
equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to cost of sales. If
changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our
reserve in the period in which we made such a determination and record a charge to cost of sales.
Contingent Payments under Endorsement Contracts
A significant portion of our demand creation expense relates to payments under endorsement contracts. In general, endorsement payments are
expensed uniformly over the term of the contract. However, certain contract elements may be accounted for differently, based upon the facts and
circumstances of each individual contract.
Some of the contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship).
We record selling and administrative expense for these amounts when the endorser achieves the specific goal.
Some of the contracts provide for payments based upon endorsers maintaining a level of performance in their sport over an extended period of time
(e.g., maintaining a top ranking in a sport for a year). These amounts are reported in selling and administrative expense when we determine that it is
probable that the specified level of performance will be maintained throughout the period. In these instances, to the extent that actual payments to the
endorser differ from our estimate due to changes in the endorser’s athletic performance, increased or decreased selling and administrative expense may be
reported in a future period.
Some of the contracts provide for royalty payments to endorsers based upon a predetermined percentage of sales of particular products. We expense
these payments in cost of sales as the related sales occur. In certain contracts, we offer minimum guaranteed royalty payments. For contractual obligations
for which we estimate we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed
payment in excess of that earned through sales of product in selling and administrative expense uniformly over the remaining guarantee period.
Property, Plant and Equipment and Definite−Lived Assets
Property, plant and equipment, including buildings, equipment, and computer hardware and software are recorded at cost (including, in some cases,
the cost of internal labor) and are depreciated over the estimated useful life. Changes in circumstances (such as technological advances or changes to our
business operations) can result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a
long−lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset’s net book value to its salvage
value.
We review the carrying value of long−lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that
the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in
the extent or manner in
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