Significant Accounting Policies

9 Months Ended

Jun. 30, 2011

Significant Accounting Policies

Significant Accounting Policies

1. Significant Accounting Policies

Basis of Presentation

The consolidated balance sheet of OYO Geospace Corporation and its subsidiaries (the "Company") at September 30, 2010 was derived from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 2011 and the consolidated statements of operations for the three and nine months ended June 30, 2011 and 2010 and the consolidated statements of cash flows for the nine months ended June 30, 2011 and 2010 were prepared by the Company without audit. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows were made. The results of operations for the three and nine months ended June 30, 2011 are not necessarily indicative of the operating results for a full year or of future operations.

Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America were omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended September 30, 2010.

Reclassifications

Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income, stockholders' equity or cash flows.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. The Company continually evaluates its estimates, including those related to reserves for bad debts, inventory obsolescence, self-insurance and product warranties. In addition, the Company assesses its long-lived assets, intangible assets and deferred income tax assets for impairment. The Company bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original or remaining maturity at the time of purchase of three months or less to be cash equivalents.

Short-term Investments

The Company classifies its investments consisting of corporate bonds, government bonds and other such investments as available-for-sale securities and records the net unrealized holding gains and losses each period as a component of comprehensive income in stockholders' equity. The Company's short-term investments have contractual maturities ranging from December 2011 to December 2013. See note 4 for additional information.

Inventories

The Company records a write-down of its inventory when the cost basis of any manufactured product, including any estimated future costs to complete the manufacturing process, exceeds its net realizable value. Inventories are stated at the lower of cost (as determined by the first-in, first-out method) or market value. The Company's subsidiary in the Russian Federation uses an average cost method to value its inventories.

Revenue Recognition

The Company primarily derives revenue from the sale and short-term rental under operating leases of seismic instruments and equipment and thermal solutions products. The Company generally recognizes sales revenues when its products are shipped and title and risk of loss have passed to the customer. The Company recognizes rental revenues as earned over the rental period. Rentals of the Company's equipment generally range from daily rentals to rental periods of six months or longer. Except for certain of the Company's reservoir characterization products, its products are generally sold without any customer acceptance provisions and its standard terms of sale do not allow customers to return products for credit. In instances where the customer requires a significant performance test for the Company's new and unproven products, the Company does not recognize the revenue attributable to the product as to which the performance test applies until the performance test is satisfied. Collection of revenue from the sale of large-scale reservoir characterization products may occur at various stages of production or after delivery of the product, and the collected funds are not refundable to the customer. Most of the Company's products do not require installation assistance or sophisticated instruction.

The Company recognizes revenue when all of the following criteria are met:

• Persuasive evidence of an arrangement exists. The Company operates under a purchase order/contract system for goods sold to customers, and under rental/lease agreements for equipment rentals. These documents evidence that an arrangement exists.

• Delivery has occurred or services have been rendered. For product sales, the Company does not recognize revenues until delivery has occurred or performance measures are met. For rental revenue, the Company recognizes revenue when earned.

• The seller's price to the buyer is fixed or determinable. Sales prices are defined in writing in a customer's purchase order, purchase contract or equipment rental agreement.

• Collectibility is reasonably assured. The Company evaluates customer credit to ensure that collectibility of revenue is reasonably assured.

Occasionally, seismic customers are not able to take immediate delivery of products which were specifically manufactured to the customer's specifications. These occasions generally occur when customers face logistical issues such as project delays or delays with their seismic crew deployment. In these instances, customers have asked the Company to hold the equipment for a short period of time until they can take physical delivery of the product (referred to as "bill and hold" arrangements). The Company considers the following criteria for recognizing revenue when delivery has not occurred:

• Whether the risks of ownership have passed to the customer,

• Whether the Company has obtained a fixed commitment to purchase the goods in written documentation from the customer,

• Whether the customer requested that the transaction be on a bill and hold basis and the Company received that request in writing,

• Whether the customer has a substantial business purpose for ordering the goods on a bill and hold basis,

• Whether there is a fixed schedule for delivery of the product,

• Whether the Company has any specific performance obligations such that the earning process is not complete,

• Whether the equipment is segregated from its other inventory and not subject to being used to fill other orders, and

• Whether the equipment is complete and ready for shipment.

The Company does not modify its normal billing and credit terms for these types of sales. As of June 30, 2011 and 2010, there were $0.3 million and zero, respectively, of sales under bill and hold arrangements.

Research and Development Costs

The Company expenses research and development costs as incurred. Research and development costs include salaries, employee benefit costs, department supplies, direct project costs and other related costs.

Product Warranties

The Company offers a standard product warranty obligating it to repair or replace equipment with manufacturing defects. The Company maintains a reserve for future warranty costs based on historical experience or, in the absence of historical product experience, management's estimates. Changes in the warranty reserve are reflected in the following table (in thousands):

Balance at the beginning of the period (October 1, 2010)	$	1,378
Accruals for warranties issued during the period		2,345
Accruals related to pre-existing warranties (including changes in estimates)		—
Settlements made (in cash or in kind) during the period		(1,458	)
Balance at the end of the period (June 30, 2011)	$	2,265

Subsequent Events

The Company evaluates events and transactions that occur after the balance sheet date but before the financial statements are issued. The Company evaluated such events and transactions through the date the financial statements were filed electronically with the Securities and Exchange Commission.

Recent Accounting Pronouncements

In May 2011, the FASB issued guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited, and is applicable to the Company's fiscal quarter beginning October 1, 2012. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income that will require a company to present components of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. The new guidance is applicable to the Company's fiscal year beginning October 1, 2012. The Company currently presents comprehensive income with the consolidated statement of stockholders' equity and the Company will evaluate the presentation upon adoption.