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Basis Of Presentation
 6 Months Ended
Jul. 02, 2011
Basis Of Presentation  
Basis Of Presentation

1. Basis of Presentation

 

EMS Technologies, Inc. ("EMS") designs, manufactures and markets products of wireless connectivity solutions over satellite and terrestrial networks. EMS keeps people and systems connected, wherever they are – on land, at sea, in the air or in space.  EMS's products and services are focused on the needs of the mobile information user, enabling universal mobility, visibility and intelligence. 

 

The consolidated financial statements include the accounts of EMS Technologies, Inc. and its subsidiaries, each of which is a wholly owned subsidiary of EMS (collectively, the "Company").  All significant intercompany balances and transactions have been eliminated in consolidation.  There are no other entities controlled by the Company, either directly or indirectly.  Certain reclassifications have been made to the 2010 consolidated financial statements to conform to the 2011 presentation.

 

The accompanying unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and are based on the Securities and Exchange Commission's ("SEC") Regulation S-X and its instructions to Form 10-Q. They do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. We have performed an evaluation of subsequent events through the date the financial statements were issued.  These interim consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

 

— Management's Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reporting of revenue and expenses and gains and losses during the period.  Actual future results could differ materially from those estimates.

 

The nature of the Company's customer arrangements to design, develop and manufacture technologically advanced products may involve uncertainty related to the costs to complete overall projects and the timing of completion of the critical phases of the projects, particularly when the projects involve novel approaches and solutions and/or require sophisticated subsystems supplied or cooperatively developed by third parties.  The accounting for such arrangement requires significant judgment regarding the ultimate amount to be realized from a revenue contract or the amount of costs to be reimbursed by customers under funded development projects, and the overall costs to be incurred.  The consolidated financial results include management's estimates of these aspects of such arrangements.  Potential penalties under customer arrangements are reflected in the financial statements based on management's assessment of the likelihood and amount of any such penalty.  That assessment often requires significant judgment by management.  Under certain arrangements it is reasonably possible that customers' claims, including penalty provisions that may be contained within the arrangements, could result in revised estimates of amounts that are materially different than management's current estimates of amounts to be realized from a revenue contract, costs to be incurred or amounts to be reimbursed under funded development projects in the near term.  

 

—Recently Adopted Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board ("FASB") issued guidance amending and clarifying requirements for fair value measurements and disclosures in the Accounting Standards Update ("ASU") 2010-06, Improving Disclosures About Fair Value Measurements. The new guidance requires disclosure of transfers in and out of Level 1 and Level 2 and a reconciliation of all activity in Level 3. The guidance also requires detailed disaggregation disclosure for each class of assets and liabilities in all levels, and disclosures about inputs and valuation techniques for Level 2 and Level 3. The guidance was effective for the Company in the first quarter of 2010 and the disclosure reconciliation of all activity in Level 3 was effective for the Company in the first quarter of 2011. The adoption of ASU 2010-06 did not have a material impact on the Company's consolidated financial statements.  

 

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations.  The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments also expand the supplemental pro forma disclosures under FASB Accounting Standards CodificationTM ("ASC") Topic 805, Business Combinations, to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.   The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after January 1, 2011. The adoption of ASU 2010-29 did not have a material impact on the Company's consolidated financial statements.  

 

In October 2009 the FASB issued two accounting standards updates that change the requirements for recognizing revenue for revenue arrangements with multiple elements.  Both updates were adopted by the Company on January 1, 2011, on a prospective basis.  The effect of adoption was not material to the Company's consolidated financial statements for the three and six months ended July 2, 2011.  The Company does not currently anticipate that the adoption will have a material effect on the consolidated financial statements for the year ending December 31, 2011, since historically the Company has not had significant aggregate deferrals of revenue related to multiple-element arrangements for which revenue would be recognized earlier under the new ASUs.  However, the actual effect on the consolidated financial statements will depend on the specific types of multiple-element arrangements into which the Company enters in the future and the terms and conditions contained therein. 

 

ASU 2009-13, Revenue Recognition - Multiple-Deliverable Revenue Arrangements, amends the accounting for revenue arrangements with multiple deliverables. Among other things, ASU 2009-13:

·Eliminates the requirement for objective evidence of fair value of an undelivered item for treatment of the delivered item as a separate unit of accounting;

·Requires use of the relative selling price method for allocating total consideration to elements of the arrangement instead of the relative-fair-value method or the residual method;

·Allows the use of an estimated selling price for any element within the arrangement to allocate consideration to individual elements when vendor-specific objective evidence or other third party evidence of selling price do not exist; and

·Expands the required disclosures.

 

ASU 2009-14, Software - Certain Revenue Arrangements That Include Software Elements, amends the guidance for revenue arrangements that contain tangible products and software elements.  ASU 2009-14 redefines the scope of arrangements that fall within software revenue recognition guidance by specifically excluding tangible products that contain software components that function together to deliver the essential functionality of the tangible product. Such tangible products excluded from the requirements of software revenue recognition requirements under ASU 2009-14 would follow the revenue recognition requirements for other revenue arrangements, including the new requirements for multiple-deliverable arrangements contained in ASU 2009-13. 

 

In multiple-element revenue arrangements into which the Company enters or that are materially modified after adoption of the new standards updates on January 1, 2011, the Company recognizes revenue separately for each separate unit of accounting per the guidance contained in the new standards updates.  To recognize revenue for an element that has been delivered when other elements within the arrangement have not been delivered, the delivered element must be determined to be a separate unit of accounting.  For a delivered item to qualify as a separate unit of accounting, it must have standalone value apart from the undelivered item.  For arrangements with tangible products that contain software components that function together to deliver the essential functionality of the tangible product, these same separation criteria apply.  For arrangements that include software that is more than incidental and that does not function together with a tangible product, the Company must also have vendor-specific objective evidence of fair value of the undelivered item for the delivered item to be considered a separate unit of accounting.  When a delivered item is considered to be a separate unit of accounting, the amount of revenue recognized upon delivery (assuming all other revenue recognition criteria are met) is generally an allocation of the arrangement consideration based on the relative selling price of the delivered item to the aggregate standalone selling prices of all deliverables.  The amount of revenue to be recognized for a delivered item is limited to the amount of consideration that is not contingent upon delivery of the other elements within the revenue arrangement.  When a delivered item is not considered a separate unit of accounting, revenue is deferred and generally recognized as the undelivered item qualifies for revenue recognition.

 

In multiple-element revenue arrangements into which the Company entered prior to January 1, 2011, the Company recognizes revenue separately for each separate unit of accounting per the guidance that existed prior to the new standards updates.  To recognize revenue for an element that has been delivered when other elements within the arrangement have not been delivered, the delivered element must be determined to be a separate unit of accounting.  For a delivered item to qualify as a separate unit of accounting, it must have standalone value apart from the undelivered item, and there must be objective evidence of the fair value of the undelivered item.  For arrangements that include software that is more than incidental, the undelivered item must have vendor-specific objective evidence of fair value.  When a delivered item is considered to be a separate unit of accounting, the amount of revenue recognized upon delivery (assuming all other revenue recognition criteria were met) is generally an allocation of the arrangement consideration based on the relative fair value of the delivered item to the aggregate fair value of all deliverables.  If the Company cannot determine the fair value of the delivered item, the residual method is used to determine the amount of the arrangement consideration to allocate to the delivered item.  When a delivered item is not considered a separate unit of accounting, revenue is deferred and generally recognized as the undelivered item qualifies for revenue recognition.

 

The following describes the primary multiple-element revenue arrangements into which the Company generally enters and certain provisions relevant to the accounting under the new accounting standards updates:

 

  • Certain arrangements require that the Company design and develop technology products to specifications provided by the customer and manufacture and deliver the technology products.  Such arrangements may also include services.  These arrangements generally do not fall under the guidelines of the new accounting standards updates, but are accounted for in accordance with specific accounting guidance for construction-type and production-type contracts for which specifications are provided by the customer, generally following the percentage-of-completion method of accounting.  If an arrangement includes post-contract support, revenue for the support services is generally recognized on the straight-line basis over the period of support.
  • Other customer arrangements include the delivery of a standard product and a related service contract that provides warranty and product maintenance over periods ranging from one to three years.  Generally, the products are considered a separate unit of accounting, and revenue is recognized upon delivery.  The service contracts are accounted for as separately priced extended warranty and product maintenance contracts and the revenue is deferred based on the stated contract price and recognized in income on a straight-line basis over the contract period.
  • The Company also enters arrangements under which the Company delivers a standard product and one or more services, such as, installation, training certification, airtime and support.  Under certain of these arrangements, the product and certain services are considered a single unit of accounting since the product does not have standalone value without the related services.  Under such arrangements the revenue is recognized for that combined unit of accounting when the revenue recognition criteria are met for the services.  In other arrangements, the product does have standalone value without the service, in which case the revenue is recognized when the recognition criteria are met for that unit of accounting.  The arrangement consideration is allocated to the units of accounting based on the relative selling prices of each element on a standalone basis.  The standalone selling prices for each element are determined based on the best available information for each element of the arrangement.  Many of the Company's products and services are sold in standalone transactions, in which case the Company uses the selling prices in those standalone sales transactions to comparable customers for the standalone selling prices.  Such standalone sales are considered vendor specific objective evidence of selling price.  For products and services for which the Company has no, or limited, standalone sales transactions, the Company estimates standalone selling price using a combination of the limited standalone sales, price lists, cost plus margins, standalone sales of similar products and stated contract prices. 

 

—Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2011, FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income: Presentation of Comprehensive Income ("ASU 2011-05"). ASU 2011-05 amends existing guidance by allowing only two options for presenting the components of net earnings and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net earnings must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years beginning after December 15, 2011. The Company will adopt the provisions of ASU 2011-05 in the first quarter of 2012, and is currently evaluating which presentation option for the components of net earnings and other comprehensive income will be used.