Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying unaudited Condensed Consolidated Financial Statements of Kimball International, Inc. (the "Company," "Kimball," "we," us," or "our") have been prepared in accordance with the instructions to Form 10-Q. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been condensed or omitted, although we believe that the disclosures are adequate to make the information presented not misleading. All significant intercompany transactions and balances have been eliminated. Management believes the financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial statements for the interim periods. The results of operations for the interim periods shown in this report are not necessarily indicative of results for any future interim period or for the entire fiscal year. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.

Notes Receivable and Trade Accounts Receivable:

Kimball's notes receivable and trade accounts receivable are recorded per the terms of the agreement or sale, and accrued interest is recognized when earned. We determine on a case-by-case basis the cessation of accruing interest, the resumption of accruing interest, the method of recording payments received on nonaccrual receivables, and the delinquency status for our limited number of notes receivable.

Our policy for estimating the allowance for credit losses on trade accounts receivable and notes receivable includes analysis of such items as agement, credit worthiness, payment history, and historical bad debt experience. Management uses these specific analyses in conjunction with an evaluation of the general economic and market conditions to determine the final allowance for credit losses on the trade accounts receivable and notes receivable. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. Our limited number of notes receivable allows management to monitor the risks, credit quality indicators, collectability, and probability of impairment on an individual basis. Adjustments to the allowance for credit losses are recorded in selling and administrative expenses.

Non-operating Income (Expense), net:

The non-operating income (expense), net line item includes the impact of such items as foreign currency rate movements and related derivative gain or loss, fair value adjustments on Supplemental Employee Retirement Plan (SERP) investments, investment gain or loss, non-production rent income, bank charges, and other miscellaneous non-operating income and expense items that are not directly related to operations. The gain (loss) on SERP investments is exactly offset by a change in the SERP liability that is recognized in selling and administrative expenses.

Components of Non-operating income (expense), net:



	Three Months Ended						Six Months Ended
	December 31						December 31
(Amounts in Thousands)	2012			2011			2012			2011
Foreign Currency/Derivative Gain (Loss)	$	(124	)	$	378		$	(516	)	$	1,152
Gain (Loss) on Supplemental Employee Retirement Plan Investments	283			1,087			986			(875		)
Impairment Loss on Privately-Held Investment	(735		)	—			(735		)	—
Loss on Stock Warrants	(751		)	(11		)	(752		)	(41		)
Other	(143		)	(105		)	(269		)	(200		)
Non-operating income (expense), net	$	(1,470	)	$	1,349		$	(1,286	)	$	36

Income Taxes:

In determining the quarterly provision for income taxes, Kimball uses an estimated annual effective tax rate which is based on expected annual income, statutory tax rates, and available tax planning opportunities in the various jurisdictions in which we operate. Unusual or infrequently occurring items are separately recognized in the quarter in which they occur.

Our effective tax rate was 12.3% and 23.6%, respectively, for the three and six months ended December 31, 2012, as compared to 43.8% and 43.2%, respectively, for the three and six months ended December 31, 2011. The effective tax rate was favorably impacted by earnings in foreign jurisdictions which have a lower statutory tax rate than the U.S. in both the three and six months ended December 31, 2012. The effective tax rate for the three and six months ended December 31, 2011 included unfavorable net tax accrual adjustments of $0.4 million and $0.6 million, respectively.

New Accounting Standard:

In June 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminated the option to present the components of other comprehensive income as part of the Statement of Share Owners' Equity. Instead, we must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The guidance became effective for our first quarter fiscal year 2013 financial statements on a retrospective basis. As this guidance only amended the presentation of the components of comprehensive income, the adoption did not impact our consolidated financial position, results of operations, or cash flows.