SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

The Consolidated Financial Statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (collectively, the “Company”). All inter-company transactions are eliminated in consolidation. The Consolidated Financial Statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles in annual financial statements. Refer to our Annual Report on Form 10-K for the fiscal year ended December 30, 2012 for the most recent disclosure of our accounting policies.

The Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly our financial position at September 29, 2013 and December 30, 2012 and our results of operations for the thirteen and thirty-nine weeks ended September 29, 2013 and September 23, 2012 and changes in cash flows for the thirty-nine weeks ended September 29, 2013 and September 23, 2012. The results of operations for the interim period should not be considered indicative of results to be expected for the full year.

Other Expense

In December of 2011, we identified errors in our financial statements resulting from improper and fraudulent activities of a certain former employee of our Canada sales subsidiary as part of the transition of our Canadian operations into our shared service environment in North America. In the period from 2005 through the fourth quarter of 2011, the then Controller of our Canadian operations was able to misappropriate cash through various schemes. The defalcation of cash was concealed by overriding internal controls at the subsidiary which had the effect of misstating certain accounts including cash, accounts receivable, and inventories as well as income taxes and non-income taxes payable and operating expenses.

The total cumulative gross financial statement impact of the improper and fraudulent activities was approximately $5.2 million and impacted fiscal years 2005 through 2011 of which $1.1 million was recovered by us from the perpetrator during the fourth quarter of 2011, resulting in a net cumulative financial statement impact of $4.1 million. The fiscal year 2011 financial statement impact was $0.2 million income due to the recovery of $1.1 million offset by expense of $0.9 million. We incurred additional expenses related to the improper and fraudulent activities of $0.7 million during the first quarter of 2012. The financial statement impacts of the improper and fraudulent Canadian activities have been included in other expense in the Consolidated Statements of Operations. We filed a claim during the second quarter of 2012 with our insurance provider for the unrecovered amount of the loss. On October 10, 2012, we received compensation of $4.7 million for the financial impact of the fraudulent Canadian activities from our insurance provider.

Out of Period Adjustments

During the nine months ended September 29, 2013, we recorded prior period accounting adjustments which had the impact of decreasing selling, general and administrative expenses by $1.0 million, increasing gross profit by $0.1 million and decreasing net loss by $0.8 million. We do not believe that these adjustments are material to our Consolidated Financial Statements for any prior or current period, nor do we believe that these adjustments will be material to our fiscal 2013 results.

Internal-Use Software

Included in fixed assets is the capitalized cost of internal-use software. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over their estimated useful lives, which generally range from three to five years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.

During 2009, we announced that we are in the initial stages of implementing a company-wide ERP system to handle the business and finance processes within our operations and corporate functions. The total amount of gross internal-use software costs capitalized since the beginning of the ERP implementation as of September 29, 2013 and December 30, 2012 were $22.8 million and $22.8 million, respectively. As of September 29, 2013, $18.1 million of supporting software packages that were placed in service is recorded in machinery and equipment. The remaining costs of $4.7 million and $4.7 million as of September 29, 2013 and December 30, 2012, respectively, are capitalized as construction-in-progress until such time as the European ERP system, which is currently suspended, has been placed in service. Planning initiatives are underway to begin the implementation of our Asia Pacific Apparel Labeling Solutions (ALS) ERP system.

Customer Rebates

We record estimated reductions to revenue for customer incentive offerings, including volume-based incentives and rebates. The accrual for these incentives and rebates, which is included in the Other Accrued Expenses section of our Consolidated Balance Sheet, was $12.3 million and $15.2 million as of September 29, 2013 and December 30, 2012, respectively. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented.

Assets Held For Sale

As a result of our restructuring plans, certain long-lived assets of our manufacturing facilities met held for sale criteria during the second quarter ended June 24, 2012 and $3.7 million of property, plant, and equipment, net was reclassified into other current assets on the Consolidated Balance Sheet. In the third quarter ended September 23, 2012, these long-lived assets of our manufacturing facilities were sold, resulting in a gain on sale of $0.8 million that was recognized in other exit costs within restructuring expenses on the Consolidated Statement of Operations.

Non-controlling Interests

On May 16, 2011, Checkpoint Holland Holding B.V., a wholly-owned subsidiary, acquired 51% of the outstanding voting shares of Shore to Shore PVT Ltd. (Sri Lanka) in exchange for $1.7 million in cash.

In January 2013, we entered into an agreement to sell our 51% interest in Sri Lanka to the unrelated third party holding the non-controlling interest. On June 24, 2013, we completed the sale of our 51% interest for which we received cash proceeds of $0.2 million (net of a stamp duty). The gain on sale of $0.2 million is recorded within other operating income on the Consolidated Statement of Operations.

We have classified non-controlling interests as equity on our Consolidated Balance Sheets as of December 30, 2012 and presented net income attributable to non-controlling interests separately on our Consolidated Statements of Operations for the three and nine months ended September 29, 2013 and September 23, 2012.

Warranty Reserves

We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions.

The following table sets forth the movement in the warranty reserve which is located in the Other Accrued Expenses section of our Consolidated Balance Sheets:



(amounts in thousands)
Nine months ended	September 29, 2013
Balance at beginning of year	$	3,995
Accruals for warranties issued, net	3,353
Settlements made	(2,980		)
Foreign currency translation adjustment	(4		)
Balance at end of period	$	4,364

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of tax, for the nine months ended September 29, 2013 were as follows:



(amounts in thousands)	Pension plan			Changes in realized and unrealized gains (losses) on derivative hedges			Foreign currency translation adjustment		Total accumulated other comprehensive income
Balance, December 30, 2012	$	(17,765	)	$	21		$	18,539	$	795
Other comprehensive (loss) income before reclassifications	(339		)	—			705		366
Amounts reclassified from other comprehensive income (loss)	824			(21		)	120		923
Net other comprehensive income (loss)	485			(21		)	825		1,289
Balance, September 29, 2013	$	(17,280	)	$	—		$	19,364	$	2,084

The significant items reclassified from each component of other comprehensive income (loss) for the nine months ended September 29, 2013 were as follows:



(amounts in thousands)
Details about accumulated other comprehensive income (loss) components	Amount reclassified from accumulated other comprehensive income (loss)			Affected line item in the statement where net loss is presented
Amortization of pension plan items
Actuarial loss ⁽¹⁾	$	(1,165	)
Prior service cost ⁽¹⁾	(2		)
	(1,167		)	Total before tax
	343			Tax benefit
	$	(824	)	Net of tax

Gains and (losses) on cash flow hedges
Foreign currency revenue forecast contracts	$	160		Cost of revenues
	160			Total before tax
	(139		)	Tax expense
	$	21		Net of tax

Non-controlling interest
Sale of 51% interest in Sri Lanka subsidiary	$	(120	)	Other operating income
	(120		)	Total before tax
	—			Tax expense
	$	(120	)	Net of tax

Total reclassifications for the period	$	(923	)


⁽¹⁾	These accumulated other comprehensive income components are included in the computation of net periodic pension costs. Refer to Note 9 of the Consolidated Financial Statements.

Subsequent Events

We perform a review of subsequent events in connection with the preparation of our financial statements. The accounting for and disclosure of events that occur after the balance sheet date, but before our financial statements are issued or available to be issued are reflected where appropriate in our financial statements.

Recently Adopted Accounting Standards

In July 2012, the FASB issued ASU 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," (ASU 2012-02). ASU 2012-02 amends the guidance in ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment by allowing an entity to perform a qualitative impairment assessment before proceeding to the two-step impairment test. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. In addition, the ASU does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which for us was December 31, 2012, the first day of our 2013 fiscal year. The adoption of this standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.

In October 2012, the FASB issued ASU 2012-04, "Technical Corrections and Improvements," (ASU 2012-04). ASU 2012-04 amends current guidance by clarifying the FASB Accountings Standards Codification (Codification), correcting unintended application of guidance, or making minor improvements to the Codification. These amendments are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, the amendments included in ASU 2012-04 intend to make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments in ASU 2012-04 that will not have transition guidance were effective upon issuance. For public entities, the amendments that are subject to the transition guidance were effective for fiscal periods beginning after December 15, 2012, which for us was December 31, 2012, the first day of our 2013 fiscal year. The adoption of this standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.

In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. This ASU is effective prospectively for reporting periods beginning after December 15, 2012, which for us was December 31, 2012, the first day of our 2013 fiscal year. Any required changes in presentation requirements and disclosures have been included in our Consolidated Financial Statements beginning with the first quarter ended March 31, 2013. The adoption of this standard has not had a material effect on our Consolidated Results of Operations and Financial Condition.

New Accounting Pronouncements and Other Standards

In December 2011, the FASB issued ASU 2011-11, "Balance Sheet – Disclosures about Offsetting Assets and Liabilities (Topic 210-20)," (ASU 2011-11). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.

In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date,” (ASU 2013-04). The update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed as of the reporting date as the sum of the obligation the entity agreed to pay among its co-obligors and any additional amount the entity expects to pay on behalf of its co-obligors. This ASU is effective for annual and interim periods beginning after December 15, 2013 and is required to be applied retrospectively to all prior periods presented for those obligations that existed upon adoption of the ASU. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.

In March 2013, the FASB issued ASU 2013-05, “Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” (ASU 2013-05). The update clarifies that complete or substantially complete liquidation of a foreign entity is required to release the cumulative translation adjustment (CTA) for transactions occurring within a foreign entity. However, transactions impacting investments in a foreign entity may result in a full or partial release of CTA even though complete or substantially complete liquidation of the foreign entity has not occurred. Furthermore, for transactions involving step acquisitions, the CTA associated with the previous equity-method investment will be fully released when control is obtained and consolidation occurs. This ASU is effective for fiscal years beginning after December 15, 2013. We will apply the guidance prospectively to derecognition events occurring after the effective date. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.

In April 2013, the FASB issued ASU 2013-07, “Liquidation Basis of Accounting,” (ASU 2013-07). The objective of ASU 2013-07 is to clarify when an entity should apply the liquidation basis of accounting and to provide principles for the measurement of assets and liabilities under the liquidation basis of accounting, as well as any required disclosures. The ASU is effective prospectively for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.

In July 2013, the FASB issued ASU 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes,” (ASU 2013-10). The update permits the use of the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under FASB ASC Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government (UST) and the London Interbank Offered Rate (LIBOR). The update also removes the restriction on using different benchmark rates for similar hedges. This ASU is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this standard is not expected to have a material effect on our Consolidated Results of Operations and Financial Condition.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” (ASU 2013-11). The amendments in ASU 2013-11 provide guidance on the financial statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU is effective for annual and interim periods beginning after December 15, 2013. We are currently evaluating the impact of adopting this guidance.