Note 2 - Significant Accounting Policies
|9 Months Ended|
Dec. 31, 2015
|Note 2 - Significant Accounting Policies||
Note 2 Organization and Summary of Significant Accounting Policies
This Organization and Summary of Significant Accounting Policies of Profire Energy, Inc. and Subsidiaries (the Company) is presented to assist in understanding the Companys consolidated financial statements. The Companys accounting policies conform to accounting principles generally accepted in the United States of America (U.S. GAAP).
Organization and Line of Business
The Parent was incorporated on May 5, 2003 in the State of Nevada. The Subsidiary was incorporated on March 6, 2002 in the province of Alberta, Canada.
The Company provides burner and chemical management products and services for the oil and gas industry in Canadian and United States (U.S.) markets.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make 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 reportable amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include our wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Basic and Diluted Earnings Per Share
The computation of basic earnings per share of common stock is based on the weighted average number of shares outstanding during the periods presented using the treasury stock method. The computation of fully diluted earnings per share includes common stock equivalents outstanding at the balance sheet date. The Company had 267,691 and 696,219 equity awards included in the fully diluted earnings (loss) per share as of December 31, 2015 and 2014, respectively.
Foreign Currency and Comprehensive Income
The functional currency of the Company and its subsidiaries in the U.S. and Canada are the U.S. Dollar (USD) and the Canadian Dollar (CAD), respectively. The Companys financial statements were translated to USD using period-end exchange rates for the balance sheet, and average exchange rates for the statements of operations. Equity transactions were translated using historical rates. The period-end exchange rates of 0.720900 and 0.788786 were used to convert the Companys December 31, 2015 and March 31, 2015 balance sheets, respectively, and the statements of operations used weighted average rates of 0.775800 and 0.918000 for the nine months ended December 31, 2015 and 2014, respectively. All amounts in the financial statements and footnotes are presented in USD, unless otherwise identified.
Foreign currency translation gains or losses as a result of fluctuations in the exchange rates are reflected in the Consolidated Statement of Operations and Comprehensive Income.
The Company recorded aggregate transaction gains of $428,112 and $0 during the nine months ended December 31, 2015 and 2014, respectively.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair value.
The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these instruments. Management is of the opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents include cash and all debt securities with an original maturity of 90 days or less. As of December 31, 2015 and March 31, 2015, cash and cash equivalents totaled $19,281,501 and $14,144,796, respectively. As of December 31, 2015 $250,000 USD was guaranteed by the FDIC and $72,090 USD was guaranteed by the Province of Alberta, Canada.
Receivables from the sale of goods and services are stated at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts. The allowance is calculated based on past collectability and customer relationships. The Company recorded an allowance for doubtful accounts of $211,068 and $108,641 as of December 31, 2015 and March 31, 2015, respectively.
In accordance with Accounting Research Bulletin No. 43 Inventory Pricing, the Companys inventory is valued at the lower of cost (the purchase price, including additional fees) or market based on using the entire value of inventory. Inventories are determined based on the average cost method. As of December 31, 2015 and March 31, 2015, inventory consisted of the following:
The Company periodically reviews the carrying amount of long-lived assets for impairment. An asset is considered impaired when estimated future cash flows are less than the assets carrying amount. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow.
Beginning in fiscal year 2016, the Company revised the estimated useful lives from 5 to 7 years for furniture and fixtures, and machinery and equipment, 25 to 30 years for buildings, 3 to 5 years for vehicles, and added a software asset type with a useful life of 2 years. The change in depreciable lives is considered a change in accounting estimate on a prospective basis from April 1, 2015 and had an immaterial impact on overall financial statements for the period ended December 31, 2015.
Other Intangible Assets
The Company accounts for Other Intangible Assets under the guidance of Accounting Standards Codification (ASC) 350, IntangiblesGoodwill and Other. The Company capitalizes certain costs related to patent technology, as a substantial portion of the purchase price related to the Companys acquisition of VIM assets has been assigned to patents. Under the guidance, Other Intangible Assets with definite lives are amortized over estimated useful lives. Intangible assets with indefinite lives are tested annually for impairment.
Goodwill, representing the difference between the total purchase price and the fair value of assets (tangible and intangible) and liabilities at the date of acquisition, is reviewed for impairment annually, and more frequently as circumstances warrant, and written down only in the period in which the recorded value of such assets exceeds their fair value. The Company does not amortize goodwill in accordance with Financial Accounting Standards Board (the FASB) ASC 350, IntangiblesGoodwill and Other. Goodwill is tested for impairment at the reporting unit level. The Companys two operating segments comprise the reporting unit for goodwill impairment testing purposes.
The Company records sales when a firm sales agreement is in place, delivery has occurred or services have been rendered, and collectability of the fixed or determinable sales price is reasonably assured. If customer acceptance of products is not assured, the Company records sales only upon formal customer acceptance.
Cost of Sales
The Company includes product costs (i.e., material, direct labor and overhead costs), shipping and handling expense, production-related depreciation expense and product license agreement expense in cost of sales.
The Company classifies advertising expenses as general and administrative. The Company incurred advertising costs of $64,632 and $172,464 in the nine months ended December 31, 2015 and 2014, respectively.
The Company follows the provisions of ASC 718, Share-Based Payment. which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The Company uses the Black-Scholes pricing model for determining the fair value of stock based compensation.
The Parent is subject to U.S. income taxes on a stand-alone basis. The Parent and its Subsidiaries file separate stand-alone tax returns in each jurisdiction in which they operate. One Subsidiary is a corporation operating in Canada and is subject to Canadian income taxes on its stand-alone taxable income. The effective rates of income tax expense (benefit) are 27% and 26% for the nine months ended December 31, 2015 and 2014, respectively.
The Company utilizes an asset and liability approach for financial accounting and reporting for income taxes. Deferred income taxes are provided for temporary differences in the basis of assets and liabilities as reported for financial statement and income tax purposes. Deferred income taxes reflect the tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax assets is dependent upon future earnings, if any. The Company makes estimates and judgments in determining the need for a provision for income taxes, including the estimation of taxable income for each full fiscal year.
Research and Development
All costs associated with research and development (R&D) are expensed when incurred. Costs incurred for R&D were $948,508 and $1,331,834 in nine months ended December 31, 2015 and 2014, respectively.
Shipping and Handling Fees and Costs
The Company classifies expenses for shipping and handling costs as cost of goods sold. The Company incurred shipping and handling costs of $208,881 and $420,290 during the nine months ended December 31, 2015 and 2014, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) as currently reported by the Company adjusted for other comprehensive items. Other comprehensive items for the Company consist of foreign currency translation gains and losses, and unrealized holding gains and losses on available-for-sale securities.
Recent Accounting Pronouncements
The Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Companys financial position, results of operations or cash flows.
Property and Equipment Useful Lives
Property and equipment is stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful life of the asset. Assets estimated useful lives are as follows:
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/presentationRef