Note 2. Summary of Significant Accounting Policies:

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with maturities of three months or less when purchased and include bank deposits, money market funds and debt instruments consisting of pre-refunded municipal bonds. The pre-refunded municipal bonds are classified as held-to-maturity and are carried at amortized cost. Money market funds are accounted for as available-for-sale securities under the requirements of Accounting Standards Codification ("ASC") topic 320, Investments – Debt and Equity Securities ("ASC 320").

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments, and trade receivables. The Company currently invests its excess cash in money market funds, certificates of deposit that are insured by the Federal Deposit Insurance Corporation ("FDIC") and debt investments consisting of pre-refunded municipal bonds that are secured by an irrevocable trust holding U.S. Treasury securities. The Company's U.S. bank deposits are fully insured under the FDIC.

Earnings per Share

The computation of basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share includes the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued. In periods with a net loss, all common stock equivalents are excluded from the per share calculation; therefore, the basic loss per share equals the diluted loss per share.

Inventories

Inventories are stated at the lower of first-in, first-out ("FIFO") cost or market value. The components of inventories are as follows:

 

		March 31,
(in thousands)		2012				2011
Raw material		$	5,290			$	9,035
Finished goods			6,095				10,127
Reserve for excess and obsolete inventory and net realizable value			(1,479	)			(1,551	)
Total inventories			9,906				17,611
Inventories held-for-sale (see Note 1)			—				(4,656	)
Inventories net of amounts held-for sale		$	9,906			$	12,955

Prepaid Expenses and Other Current Assets

The Company has prepaid and current assets consisting primarily of prepaid product royalty, prepaid maintenance agreements and prepaid rent, which are amortized as expense generally over the term of the underlying contract.

Property and Equipment

Property and equipment are stated at cost, net of depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, or for leasehold improvements, the shorter of the remaining lease term or the estimated useful life, as follows:

 

Machinery and equipment			5-7 years
Office, computer and research equipment			2-5 years

Depreciation expense from continuing operations was $0.5 million, $0.7 million, and $1.8 million for fiscal years 2012, 2011 and 2010, respectively. In accordance with ASC topic 360, Property, Plant and Equipment ("ASC 360"), the Company assesses all of its long-lived assets, including intangibles, for impairment when impairment indicators are identified. If the carrying value of an asset exceeds its undiscounted cash flows, an impairment loss may be necessary. An impairment loss is calculated as the difference between the carrying value and the fair value of the asset. No impairment losses were recorded in fiscal years 2012, 2011 or 2010.

Goodwill and Intangibles

In September 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment ("ASU 2011-08"), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The Company elected to early adopt the standard for the purpose of its goodwill impairment testing.

 

The Company complies with ASC topic 350, Intangibles-Goodwill and Other ("ASC 350"), which requires that goodwill and indefinite-lived intangible assets be reviewed for impairment at least annually or when an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company performs its annual impairment test in the fourth quarter of each fiscal year. The Company's Noran Tel reporting unit is the only unit that contains goodwill and indefinite-lived intangibles. The Company assessed whether it was more likely than not (that is, a likelihood of more than 50%) that Noran Tel's fair value was less than its carrying amount including goodwill by considering the following factors: macroeconomic conditions, industry and market considerations, cost factors and overall financial performance. Based on these factors, the Company determined it was necessary to perform a two-step goodwill impairment test.

The first step of a two-step evaluation performed by the Company tested for impairment by applying a fair value-based test at the reporting unit level. The Company estimated fair value using a discounted cash flow methodology estimating future cash flow, discount rates, growth rates and other assumptions, as well as, current like-company market transactions. Although the fair value was not significantly in excess of the carrying value, the Company determined the second step of measuring the amount of impairment by applying fair value-based tests to individual assets and liabilities within the reporting unit was not required. The Company did not recognize any impairment loss on goodwill in fiscal years 2012, 2011 or 2010.

Changes in the carrying amounts of goodwill by reporting units are as follows:

 

		ConferencePlus				ConferencePlus Global Services				Noran Tel				Westell Inc.				Total
Gross goodwill		$	1,052			$	322			$	1,890			$	9,651			$	12,915
Accumulated impairment			—				—				(1,381	)			(9,651	)			(11,032	)
Currency translation			—				—				279				—				279
April 1, 2010 balance, net			1,052				322				788				—				2,162
Currency translation			—				—				35				—				35
March 31, 2011 balance, net			1,052				322				823				—				2,197
ConferencePlus sale			(1,052	)			(322	)			—				—				(1,374	)
Currency translation			—				—				(22	)			—				(22	)
March 31, 2012 balance, net		$	—			$	—			$	801			$	—			$	801

Goodwill decreased by $1.4 million during fiscal year 2012 due to the sale of the ConferencePlus and ConferencePlus Global Services. As of March 31, 2012, the Company had a total of $0.8 million of goodwill included in the Westell segment.

The indefinite-lived intangible asset relates to the Noran Tel trade name. To determine the fair value of the trade name, the Company calculated the amount of royalty income it could generate if the name was licensed in an arm's length transaction to a third party. No impairment loss was recognized related to indefinite-lived assets in fiscal years 2012, 2011 or 2010.

On an ongoing basis, the Company reviews intangible assets with a definite life and other long-lived assets other than goodwill for impairment whenever events and circumstances indicate that carrying values may not be recoverable. If such events or changes in circumstances occur, the Company will recognize an impairment loss if the undiscounted future cash flow expected to be generated by the asset is less than the carrying value of the related asset. Any impairment loss would adjust the asset to its implied fair value.

The Company has finite and infinite-lived intangible assets related to its historical acquisitions.

 

The following table presents details of the Company's intangibles from historical acquisitions:

 

		March 31,
(in thousands)		2012				2011
Gross intangible assets		$	39,062			$	39,062
Accumulated amortization			(12,566	)			(12,017	)
Impairment			(23,868	)			(23,868	)
Currency translation			202				296
ConferencePlus sale			(102	)			—
Net		$	2,728			$	3,473

The finite-lived intangibles are being amortized over periods of 5 to 12 years. Finite-lived intangible amortization expense from continuing operations was $0.6 million in fiscal year 2012 and $0.5 million in fiscal years 2011 and 2010. The following is the expected future amortization by fiscal year:

 

		2013				2014				2015				2016				2017				thereafter
Intangible amortization expense		$	539			$	539			$	539			$	442			$	150			$	167

Net carrying amounts of intangible assets are as follows:

 

		March 31,
(in thousands)		2012				2011
Finite-lived intangible assets:
Product technology (1)		$	464			$	596
Customer relationships (1)			1,912				2,514
Total finite-lived intangible assets, net		$	2,376			$	3,110
Infinite-lived intangible assets:
Trade Name (2)			352				363
Total intangible assets		$	2,728			$	3,473

(1)	Change due to amortization and change in foreign currency exchange rate.

(2)	Change due to change in foreign currency exchange rate.

Revenue Recognition and Deferred Revenue

Revenue recognition on equipment where software is incidental to the product as a whole or where software is essential to the equipment's functionality and falls under software accounting scope exceptions generally occurs when products are shipped, risk of loss has transferred to the customer, objective evidence exists that customer acceptance provisions have been met, no significant obligations remain, collection is reasonably assured and warranty can be estimated.

Where multiple element arrangements exist, fair value of each element is established using the relative selling price method, which requires the Company to use vendor-specific objective evidence ("VSOE"), reliable third-party objective evidence ("TPE") or management's best estimate of selling price, in that order.

The Company's UltraLine Series3 products are sold primarily to a single customer with contractual provisions that include specified future software enhancements and post customer support ("PCS") to maintain ongoing interoperability within the customer's network. The Company was not able to establish VSOE or TPE for the specified future software enhancements and therefore relied on management's estimates of fair value for each of the multiple elements in the arrangement. Revenue is deferred for undelivered elements and recorded when delivery occurs.

The Company's product return policy allows customers to return unused equipment for partial credit if the equipment is non-custom product, is returned within specified time limits, and is currently being manufactured and sold. Credit is not offered on returned products that are no longer manufactured and sold. The Company's reserve for returns is not significant.

 

The Company's ConferencePlus segment, which is shown in discontinued operations, recognized revenue for conference calls and other services upon completion of the conference call or services.

The Company records revenue net of taxes in accordance with ASC topic 605, Revenue Recognition ("ASC 605").

Shipping and Handling

The Company recorded costs related to shipping and handling expense of $0.7 million, $1.1 million and $1.2 million in sales and marketing expense for the fiscal years 2012, 2011 and 2010, respectively.

Short-term Investments

Certificates of deposit held for investment with an original maturity greater than 90 days are carried at cost and included in "short-term investments" on the Consolidated Balance Sheets. The certificates of deposit are insured by the Federal Deposit Insurance Corporation ("FDIC") and are not debt securities. The Company also invests in debt instruments consisting of pre-refunded municipal bonds. The income and principal from these pre-refunded bonds are secured by an irrevocable trust holding U.S Treasury securities. The bonds have original maturities of greater than 90 days, but have remaining maturities of less than one year. The pre-refunded municipal bonds are classified as held-to-maturity and are carried at amortized cost.

Product Warranties

Most of the Company's products carry a limited warranty ranging up to seven years for Westell segment products and from one to three years for CNS segment products. The Company accrues for estimated warranty costs as products are shipped based on historical sales and cost of repair or replacement trends relative to sales. See Note 6 for further discussion of the Company's product warranties.

Research and Development Costs

Engineering and product research and development costs are charged to expense as incurred.

Stock-based Compensation

The Company applies ASC topic 718, Compensation – Stock Compensation ("ASC 718"), to account for stock-based compensation. ASC 718 requires all employee share-based payments be measured at fair value on the award's grant date and be recognized in the financial statements over the requisite service period. Determining the fair value of equity-based options requires the Company to estimate the expected volatility of its stock, the risk-free interest rate, expected option term, expected dividend yield and expected forfeitures. See Note 8 for further discussion of the Company's share-based compensation plans.

Fair Value Measurements

The Company accounts for the fair value of assets and liabilities in accordance with ASC topic 820, Fair Value Measurements and Disclosures ("ASC 820"). ASC 820 defines fair value and establishes a framework for measuring fair value as required by other accounting pronouncements. See Note 13 for further discussion of the Company's fair value measurements.

 

Foreign Currency Translation

The financial position and the results of operations of the Company's foreign subsidiary are measured using local currency as the functional currency. Assets and liabilities of the subsidiary are translated at the exchange rate in effect at the end of each period. Income statement accounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation adjustment account in stockholders' equity.

The Company records transaction gains (losses) for fluctuations on foreign currency rates on accounts receivable, cash and on intercompany accounts anticipated by management to be settled in the foreseeable future as a component of Other income (expense), net on the Consolidated Statements of Operations.

Income Taxes

The Company accounts for income taxes under the provisions of ASC topic 740, Income Taxes ("ASC 740"). ASC 740 requires an asset and liability based approach in accounting for income taxes. Deferred income tax assets, including net operating loss ("NOL") and certain tax credit carryovers and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities, applying enacted statutory tax rates in effect for the year in which the tax differences are expected to reverse. Valuation allowances are provided against deferred tax assets which are not likely to be realized. On a regular basis, management evaluates the recoverability of deferred tax assets and the need for a valuation allowance. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. See Note 4 for further discussion of the Company's income taxes.

New Accounting Standards Adopted

Effective January 1, 2012, the Company adopted ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments in this update generally represent clarifications of ASC 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and the International Financial Reporting Standards ("IFRS"). The amendments in this update are applied prospectively. Adoption of this ASU did not have a material impact to the Company's Consolidated Financial Statements.

Effective January 1, 2012, the Company adopted ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income ("ASU 2011-05"). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of stockholders equity and requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This update was applied retrospectively. The adoption of ASU 2011-05 did not have a material effect on the Company's consolidated financial statements, but required a change in the presentation of the Company's comprehensive income from the notes of the Consolidated Financial Statements to present two separate but consecutive statements.

Effective January 1, 2012, the Company adopted ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-12"). ASU 2011-12 defers the changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to other comprehensive income. These amendments are being delayed to allow the FASB time to redeliberate whether to present the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income on the face of the financial statements for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, the Company is required to continue reporting reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.