Abercrombie & Fitch 2014 Annual Report Download - page 39

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Policy Effect if Actual Results Differ from Assumptions
Equity Compensation Expense
The Company’s equity compensation expense related to stock
appreciation rights granted is estimated using the Black-
Scholes option-pricing model to determine the fair value of
the stock appreciation right grants, which requires the
Company to estimate the expected term of the stock
appreciation right grants and expected future stock price
volatility over the expected term.
During Fiscal 2014, the Company granted stock appreciation
rights covering an aggregate of 512,216 shares. A 10%
increase in the assumed expected term would have yielded a
4% increase in the Black-Scholes valuation for stock
appreciation rights granted during the year, while a 10%
increase in assumed stock price volatility would have yielded
a 9% increase in the Black-Scholes valuation for stock
appreciation rights granted during the year. This would result
in an increase to expense by an insignificant amount.
Supplemental Executive Retirement Plan
Effective February 2, 2003, the Company established a
Supplemental Executive Retirement Plan to provide
additional retirement income to its former CEO. On
December 8, 2014, the former CEO retired from his position
as A&F's Chief Executive Officer. Mr. Jeffries' employment
with the Company terminated on December 31, 2014. In
connection with his Employment Agreement, the former
CEO will receive a monthly benefit equal to 50% of his final
average compensation (as defined in the SERP) for life. The
Company’s accrual for the SERP requires management to
make assumptions and judgments related to the CEO’s life
expectancy and discount rate.
The Company does not expect material changes in the near
term to the underlying assumptions used to determine the
accrual for the SERP. 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 50 basis point increase in the discount rate would decrease
the SERP accrual by an insignificant amount.
Legal Contingencies
The Company is a defendant in lawsuits and other adversarial
proceedings arising in the ordinary course of business. Legal
costs incurred in connection with the resolution of claims and
lawsuits are expensed as incurred, and the Company
establishes reserves for the outcome of litigation where it
deems appropriate to do so under applicable accounting rules.
Actual liabilities may exceed or be less than the amounts
reserved, and there can be no assurance that the final
resolution of these matters will not have a material adverse
effect on the Company’s financial condition, results of
operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Investment Securities
The Company maintains its cash equivalents in financial instruments, primarily money market funds and United States treasury
bills, with original maturities of three months or less.
The irrevocable rabbi trust (the “Rabbi Trust”) is intended to be used as a source of funds to match respective funding obligations
to participants in the Abercrombie & Fitch Co. Nonqualified Savings and Supplemental Retirement Plan I, the Abercrombie &
Fitch Co. Nonqualified Savings and Supplemental Retirement Plan II and the Supplemental Executive Retirement Plan. The Rabbi
Trust assets primarily consist of trust-owned life insurance policies which are recorded at cash surrender value. The change in
cash surrender value of the trust-owned life insurance policies held in the Rabbi Trust resulted in realized gains of $3.2 million,
$2.6 million and $2.4 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively, recorded in Interest Expense, Net on the
Consolidated Statements of Operations and Comprehensive (Loss) Income.
The Rabbi Trust assets are included in Other Assets on the Consolidated Balance Sheets and are restricted in their use as noted
above.