Abercrombie & Fitch 2009 Annual Report Download - page 44

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Policy Effect if Actual Results Differ from Assumptions
Inventory Valuation
Inventories are principally valued at the lower of
average cost or market utilizing the retail method.
The Company reduces inventory value by
recording a valuation reserve that represents
estimated future anticipated selling price decreases
necessary to sell-through the inventory.
Additionally, as part of inventory valuation, an
inventory shrink estimate is made each period that
reduces the value of inventory for lost or stolen
items.
The Company has not made any material changes
in the accounting methodology used to determine
the shrink reserve or valuation allowance over the
past three fiscal years.
The Company does not expect material changes in
the near term to the underlying assumptions used
to determine the shrink reserve or valuation
allowance as of January 30, 2010. However,
changes in these assumptions do occur, and, should
those changes be significant, they could
significantly impact the ending inventory valuation
at cost, as well as the resulting gross margins.
An increase or decrease in the inventory shrink
accrual of 10% would have affected pre-tax income
by approximately $0.8 million in Fiscal 2009.
An increase or decrease in the valuation allowance
of 10% would have affected pre-tax income by
approximately $1.1 million in Fiscal 2009.
Property and Equipment
Long-lived assets, primarily comprised of property
and equipment, are reviewed periodically for
impairment or whenever events or changes in
circumstances indicate that full recoverability of
net asset balances through future cash flows is in
question.
The Company’s impairment calculation requires
management to make assumptions and judgments
related to factors used in the evaluation for
impairment, including, but not limited to,
management’s expectations for future operations
and projected cash flows.
The Company has not made any material changes
in the accounting methodology used to determine
impairment loss over the past three fiscal years.
The Company does not expect material changes in
the near term to the assumptions underlying its
impairment calculations as of January 30, 2010.
However, changes in these assumptions do occur,
and, should those changes be significant, they
could have a material impact on the Company’s
determination of whether or not there has been an
impairment.
Income Taxes
Income taxes are calculated with the use of the
asset and liability method. Deferred tax assets and
liabilities are measured using current enacted tax
rates in effect for the years in which those
temporary differences are expected to reverse.
Inherent in the measurement of deferred balances
are certain judgments and interpretations of enacted
tax law and published guidance with respect to
applicability to the Company’s operations.
The Company’s effective tax rate is also affected by
changes in law, the tax jurisdiction of new stores,
the level of earnings and the results of tax audits.
The Company does not expect material changes in
the judgements and interpretations used to
calculate income taxes as of January 30, 2010.
However, actual results could differ, and the
Company may be exposed to gains or losses that
could be material.
43