VALUATION AND QUALIFYING ACCOUNTS

Valuation and qualifying accounts included the following:



(in thousands)	Balance Beginning of Year		Net Charged to Costs and Expenses		Translations, Reclassifications and Acquisitions			Net Write-Offs or Discounts Taken			Balance End of Year
2011
Allowance for doubtful accounts	$	2,852	$	992	$	(65	)	$	(564	)	$	3,215
Reserve for sales discounts	11,903		62,935		9			(60,280		)	14,567
Reserve for inventory obsolescence	7,506		3,403		(123		)	(3,156		)	7,630
Reserve for warranty	5,554		6,070		248			(6,559		)	5,313
2010
Allowance for doubtful accounts	$	2,548	$	1,112	$	(81	)	$	(727	)	$	2,852
Reserve for sales discounts	3,803		51,813		(2		)	(43,711		)	11,903
Reserve for inventory obsolescence	9,060		2,811		(230		)	(4,135		)	7,506
Reserve for warranty	5,972		7,225		(173		)	(7,470		)	5,554
2009
Allowance for doubtful accounts	$	2,430	$	546	$	114		$	(543	)	$	2,548
Reserve for sales discounts	6,849		25,514		5			(28,565		)	3,803
Reserve for inventory obsolescence	8,978		1,515		163			(1,596		)	9,060
Reserve for warranty	4,764		6,609		1,250			(6,651		)	5,972

Allowance for Doubtful Accounts

The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations, the Company records a specific reserve to reduce the amounts recorded to what it believes will be collected. For all other customers, it recognizes reserves for bad debt based on historical experience of bad debts as a percent of revenues for each business unit, adjusted for relative improvements or deteriorations in the aging and changes in current economic conditions.

The Company evaluates all receivables that are over 60 days old and will reserve specifically on a 90-day basis. The Company has a secured or insured interest on most of its wholegoods that each customer purchases. This allows the Company, in times of a difficult economy when the customer is unable to pay or has filed for bankruptcy (usually Chapter 11), to repossess the customer’s inventory. This also allows Alamo Group to maintain only a reserve over its cost, which usually represents the margin on the original sales price.

The allowance for doubtful accounts balance was $3,215,000 on December 31, 2011, and $2,852,000 on December 31, 2010. The increase was mainly from the Company’s Industrial and European operations.

Sales Discounts

On December 31, 2011, the Company had $14,567,000 in reserves for sales discounts compared to $11,903,000 on December 31, 2010 on product shipped to our customers under various promotional programs. The increase was due primarily to higher sales activity of the Company’s agricultural products during the pre-season, which runs from September to December of each year with orders shipped through the first quarter of 2011. The Company reviews the reserve quarterly based on analysis made on each program outstanding at the time.

The Company bases its reserves on historical data relating to discounts taken by the customer under each program. Historically, between 85% and 95% of the Company’s customers who qualify for each program actually take the discount that is available.

Inventories – Obsolete and Slow Moving

The Company had a reserve of $7,630,000 on December 31, 2011 and $7,506,000 on December 31, 2010 to cover obsolete and slow moving inventory. The increase in the reserve was mainly from the Company’s U.S. operations. The obsolete and slow moving inventory policy states that the reserve is to be calculated as follows: 1) no inventory usage over a three-year period is deemed obsolete and reserved at 100 percent; and 2) slow moving inventory with little usage requires a 100 percent reserve on items that have a quantity greater than a three-year supply. There are exceptions to the obsolete and slow moving classifications if approved by an officer of the Company, based on specific identification of an item or items that are deemed to be either included or excluded from this classification. In cases where there is no historical data, management makes a judgment based on a specific review of the inventory in question to determine what reserves, if any, are appropriate. New products or parts are generally excluded from the reserve policy until a three-year history has been established.

Warranty

The Company’s warranty policy is generally to provide its customers warranty for up to one year on all wholegood units and 90 days on parts though some components can have warranty for longer terms.

Warranty reserve, as a percentage of sales, is generally calculated by looking at the current twelve months’ expenses and prorating that amount based on twelve months’ sales with a ninety-day to six-month lag period. The Company’s historical experience is that an end-user takes approximately 90 days to six months from the receipt of the unit to file a warranty claim. A warranty reserve is established for each different marketing group. Reserve balances are evaluated on a quarterly basis and adjustments made when required.

The current liability warranty reserve balance was $5,313,000 on December 31, 2011 and $5,554,000 on December 31, 2010. The decrease was mainly from the Company’s Agricultural Division.