Note 2 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Notes To Financial Statements

Significant Accounting Policies [Text Block]

2.   Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation allowances for deferred tax assets, the carrying amount of intangibles, allowance for doubtful accounts and estimates of useful life.

Consolidation Policy

The consolidated financial statements include the accounts of Merisel Americas, Inc., which include Color Edge, Comp 24, Crush, AdProps, DCS, Fuel and Merisel Corporate.  All material intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with initial maturities of three months or less to be cash equivalents.  Cash equivalents were $980 and $707 at December 31, 2010 and 2011, respectively.  The Company invests excess cash in interest-bearing accounts.  Interest income earned on cash balances for 2009, 2010 and 2011 was $96, $64 and $60, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable are customer obligations due under normal trade terms, carried at their face value, less an allowance for doubtful accounts.  The allowance for doubtful accounts is determined based on the evaluation of the aging of accounts receivable and a case-by-case analysis of high-risk customers.  Reserves contemplate historical loss rate on receivables, specific customer situations and the general economic environment in which the Company operates.  Historically, actual results in these areas have not been materially different than the Company’s estimates, and the Company does not anticipate that its assumptions are likely to materially change in the future. However, if unexpected events occur, results of operations could be materially affected.

Unbilled Accounts Receivable

Accounts receivable included approximately $843 and $1,066 of unbilled receivables at December 31, 2010 and 2011, respectively.  These receivables are a normal part of the Company’s operations, as some receivables are normally invoiced in the month following shipment and completion of the billing process.

Concentration of Credit Risk

The Company extends credit to qualified customers in the ordinary course of its business. The Company performs ongoing credit evaluations of its customers’ financial conditions and has established an allowance for doubtful accounts based on factors surrounding the credit risk of customers, historical trends, and other information which limits their risk. The Company had one customer that accounted for approximately 24% of net sales in 2009, approximately 26% of net sales in 2010, and approximately 23% of net sales in 2011. As of December 31, 2010 and 2011, that one customer’s receivable balances were $3,889 or 28% of the total accounts receivable balance and $3,374 or 23% of the total accounts receivable balance, respectively.

Inventories

Inventories, which consist of raw materials and work-in-progress, are stated at the lower of cost (first-in, first-out method) or market value.  An inventory reserve is established to account for slow-moving materials, obsolescence and shrinkage.

Property and Depreciation

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to ten years.  Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the lease term, whichever is shorter.

Goodwill and Other Intangible Assets

The Company, which has two reporting units, follows the provisions of FASB ASC 350 “Intangibles – Goodwill and Other”.  In accordance with FASB ASC 350, goodwill and indefinite-lived intangible assets are not amortized, but reviewed for impairment upon the occurrence of events or changes in circumstances that would reduce the fair value of the Company’s reporting units below their carrying amount.

Goodwill is required to be tested for impairment at least annually. As a result of the Company’s goodwill impairment test performed in the fourth quarter of 2009, the Company recorded a non-cash goodwill impairment charge of $13,924 for the year ended December 31, 2009. As of December 31, 2010 and 2011, the Company had no remaining goodwill. See Note 4.

The Company also performed the annual impairment test for indefinite-lived trademarks during the fourth fiscal quarter of   2010 and 2011. The trademark impairment valuation is determined using the relief from royalty method. Based on the impairment analysis, the Company determined that the trademarks were not impaired as of December 31, 2010 and 2011. If the royalty rate assumption as of December 31, 2011dropped by approximately 50%, the result would be in an impairment of up to $790. For the year ended December 31, 2009, the Company recorded an impairment charge of $4,419.

The method to compute the amount of impairment incorporates quantitative data and qualitative criteria including new information that can dramatically change the decision about the valuation of an intangible asset in a very short period of time. The Company will continue to monitor the expected future cash flows of its reporting units for the purpose of assessing the carrying values of its other intangible assets. Any resulting impairment loss could have a material adverse effect on the Company’s reported financial position and results of operations for any particular quarterly or annual period.

Impairment of Long-Lived Assets

In accordance with FASB ASC 360-10-35 ”Property, Plant and Equipment”, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The Company reviews the recoverability of long-lived assets to determine if there has been any impairment.  This assessment is performed based on the estimated undiscounted future cash flows from operating activities compared with the carrying value of the related asset.  If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value and the estimated fair value of the assets.

Shipping and Handling Fees and Costs

Shipping and handling fees billed to customers for product shipments are recorded as a component of Net Sales.  Shipping and handling costs are included in Cost of Goods Sold when jobs are completed and invoiced.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that the tax change occurs. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

After weighing both the positive and negative evidence of realizing the deferred tax asset, management determined that, based on the weight of all available evidence, it was more likely than not that the Company would not realize its deferred tax assets. The most influential weighted negative evidence considered was two consecutive years of current taxable losses and uncertainty as to when taxable profit can be predicated in the future due to current economic environment. As such, the Company placed a full valuation allowance on its net deferred tax assets as of December 31, 2009. At December 31, 2010 and 2011, based on consecutive years of taxable losses the Company determined that it should keep a full valuation allowance on its net deferred tax assets.

The valuation allowance on the Company’s net deferred tax assets is reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of all or a portion of the valuation allowance. In addition, until such time that the Company determines it is more likely than not that it will generate sufficient taxable income to realize all or a portion of its deferred tax assets, income tax benefits associated with future period losses, if any, will be fully reserved and income taxes associated future period income will offset such reserve.

The Company follows FASB ASC 740-10 “Income Taxes”, which contains a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies). The Company assesses its tax positions for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date. With limited exceptions and due to the impact of net operating loss and other credit carryforwards, the Company may be effectively subject to U.S. federal income tax examinations for periods after 1996. The Company is subject to examination by state and local tax authorities generally for the period mandated by statute.  Currently the Company has no ongoing examinations. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on an audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. As a result of this review, the Company concluded that it has no uncertain tax positions. The Company does not expect any reasonably possible material changes to the estimated amount of liability associated with its uncertain tax positions through December 31, 2011. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. The Company’s policy is to recognize interest and penalties, if any, accrued on uncertain tax positions as part of selling, general, and administrative expense.

Revenue Recognition

The Company recognizes revenue when revenue is realized or realizable and has been earned. Revenue transactions represent sales of inventory. All of the Company’s services culminate with the production of a tangible product that is delivered to the final customer. The Company does not provide any services that are marketed or sold separately from its final tangible products. Our policy is to recognize revenue when title to the product, ownership and risk of loss transfer to the customer, which is typically on the date of the shipment. Appropriate provision is made for uncollectible accounts.

Fair Value Measurements

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under FASB ASC 820 “Fair Value Measurements” are described as follows:

·   Level 1- Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

·   Level 2- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

·   Level 3- Inputs that are unobservable for the asset or liability.

On a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. Long-lived tangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. The Company uses the relief from royalty method for intangibles and inputs that constitute level 3. During the fourth quarter of each year and earlier if necessary, the Company evaluates indefinite-lived and definite-lived intangibles for impairment at the reporting unit level.

Financial instruments include cash and cash equivalents. The approximate fair values of cash and cash equivalents, accounts receivable, security deposits, and accounts payable approximate their carrying value because of their short-term nature. The revolving credit fair value approximates carrying value due to the variable nature of the interest rate.

Accounting for Stock-Based Compensation

The Company follows the provisions of FASB ASC 718 “Stock Compensation” (which addresses the accounting for transactions in which an entity exchanges its equity instruments for employee services in share-based payment transactions. FASB ASC 718 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized. FASB ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Operations. The Company has not issued any options during the three years ended December 31, 2011. The Company currently uses the Black-Scholes option pricing model to determine grant date fair value.

Earnings (Loss) Per Share

Basic and diluted loss per share are computed and presented in accordance with FASB ASC 260-10  “Earnings per Share”.  Basic earnings (loss) per share was determined by dividing net earnings (loss) by the weighted-average number of common shares outstanding during each period.  Diluted earnings per share of the Company includes the impact of certain potentially dilutive securities.  However, diluted earnings per share excludes the effects of potentially dilutive securities because inclusion of these instruments would be anti-dilutive.  A reconciliation of the net income (loss) available to common stockholders and the number of shares used in computing basic and diluted earnings per share is provided in Note 13.

Segment Reporting

The Company evaluates its operating segment information in accordance with the provisions of FASB ASC 280  ‘‘Segment Reporting’’ which provides for annual and interim reporting standards for operating segments of a company. ASC 280 requires disclosures of selected segment-related financial information about products, major customers, and geographic areas based on the Company’s internal accounting methods. The Company’s chief operating decision-maker evaluates performance, makes operating decisions, and allocates resources based on consolidated information. As a result, the Company aggregates its two operating segments into one reportable segment.

Deferred Rent Policy

The Company expenses rent on a straight line basis over the life of the lease, with the non-cash expense portion accumulating in a deferred rent liability account.

Reclassifications

Certain reclassifications were made to prior year statements to conform to the current year presentation.

New Accounting Pronouncements

In May 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement “(Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification (Codification) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently assessing the impact of this update on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” to increase the prominence of other comprehensive income in the financial statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. The standard also requires that items reclassified from other comprehensive income to net income be presented on the face of the financial statements. However, in December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05” to defer the requirement to present reclassifications from other comprehensive income to net income on the face of the financial statements and require that reclassification adjustments be disclosed in the notes to the financial statements, consistent with the existing disclosure requirements. The deferral does not change the requirement to present net income, components of other comprehensive income, and total comprehensive income in either one continuous statement or two separate but consecutive statements. This guidance is effective for the periods beginning after December 15, 2011. The Company is currently in the process of evaluating the ASU but does not expect it will have a material impact on the Company’s consolidated financial statements

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities”. The Update requires an entity to offset, and present as a single net amount, a recognized eligible asset and a recognized eligible liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously. The ASU 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. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company is currently in the process of evaluating the ASU but does not expect it will have a material impact on the Company’s consolidated financial statements.