Abercrombie & Fitch 2010 Annual Report Download - page 53

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Table of Contents
Policy Effect if Actual Results Differ from Assumptions
Revenue Recognition
The Company recognizes retail sales at the time the customer takes
possession of the merchandise. The Company reserves for sales
returns through estimates based on historical experience and
various other assumptions that management believes to be
reasonable. The value of point of sale coupons that result in a
reduction of the price paid by the customer are recorded as a
reduction of sales.
The Company sells gift cards in its stores and through
direct-to-consumer operations. The Company accounts for gift
cards sold to customers by recognizing a liability at the time of
sale. The liability remains on the Company's books until the earlier
of redemption (recognized as revenue) or when the Company
determines the likelihood of redemption is remote, known as
breakage (recognized as other operating income), based on
historical redemption patterns.
The Company has not made any material changes in the
accounting methodology used to determine the sales return
reserve and revenue recognition for gift cards over the past three
fiscal years.
The Company does not expect material changes in the near term
to the underlying assumptions used to measure the sales return
reserve or to measure the timing and amount of future gift card
redemptions as of January 29, 2011. However, changes in these
assumptions do occur, and, should those changes be significant,
the Company may be exposed to gains or losses that could be
material.
A 10% change in the sales return reserve as of January 29, 2011
would have affected pre-tax income by approximately $1.7
million for Fiscal 2010.
A 10% change in the assumption of the redemption pattern for
gift cards as of January 29, 2011 would have been immaterial to
pre-tax income for Fiscal 2010.
Auction Rate Securities ("ARS")
As a result of the market failure and lack of liquidity in the current
ARS market, the Company measured the fair value of its ARS
primarily using a discounted cash flow model as well as a
comparison to similar securities in the market. Certain significant
inputs into the model are unobservable in the market including the
periodic coupon rate adjusted for the marketability discount,
market required rate of return and expected term.
The Company has not made any material changes in the
accounting methodology used to determine the fair value of the
ARS.
The Company does not expect material changes in the near term
to the underlying assumptions used to determine the
unobservable inputs used to calculate the fair value of the ARS
as of January 29, 2011. However, changes in these assumptions
do occur, and, should those changes be significant, the
Company may be exposed to gains or losses that could be
material.
Assuming all other assumptions disclosed in Note 6, "Fair
Value" of the Notes to Consolidated Financial Statements
included in "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" of this Annual Report on Form
10-K, being equal, a 50 basis point increase in the market
required rate of return will yield approximately a 14% increase
in impairment and a 50 basis point decrease in the market
required rate of return will yield a 14% decrease in impairment.
50