BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2011

BASIS OF PRESENTATION

BASIS OF PRESENTATION

NOTE 1 – BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ArthroCare Corporation (“ArthroCare”) and its subsidiaries (collectively with ArthroCare, the “Company”) have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles (“GAAP”).  The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s 2010 Annual Report on Form 10-K filed on February 14, 2011 (“2010 Form 10-K”).  In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of the Company at September 30, 2011 and December 31, 2010, the results of its operations for the three and nine month periods ended September 30, 2011 and 2010, and its cash flows for the nine month periods ended September 30, 2011 and 2010.  The results of operations for the periods presented are not necessarily indicative of results that may be expected for the year ending December 31, 2011.

Use of Estimates

The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q using management’s best estimates and judgments where appropriate.  These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements.  The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period.  Actual results could differ materially from these estimates and judgments.

Reclassification of prior period presentation

In the third quarter of 2011, the Company reclassified advances of legal fees paid pursuant to indemnification agreements that were entered into with certain former executives and employees while they were employed with the Company to investigation and restatement related costs that had previously been reported as general and administrative expenses.  The reclassifications had no effect on total operating expenses or income from operations.  The amounts advanced, net of insurance recoveries, and reclassified from general and administrative costs to investigation and restatement related cost for prior periods was $2.7 million for the six month period ending June 30, 2011, ($0.4) million for the three month period ending September 30, 2010 and $1.4 million for the nine month period ending September 30, 2010.  Net legal costs advanced under the indemnification agreements was $2.6 million for the quarter ended September 30, 2011.

Recent Accounting Pronouncements

In June 2011, the FASB issued new guidance on the presentation of comprehensive income which becomes effective for fiscal years and interim periods beginning after December 15, 2011.  Management does not believe the adoption of the new guidance will have an impact on the Company’s consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued new guidance on testing goodwill for impairment which is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted.  The Company will adopt the new guidance beginning in the fourth quarter of 2011 when it performs its annual goodwill impairment test.  Management does not believe the adoption of the new guidance will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.