Abercrombie & Fitch 2015 Annual Report Download - page 38

Table of Contents
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Policy Effect if Actual Results Differ from Assumptions
Income Taxes
The provision for income taxes is determined using the asset
and liability approach. Tax laws often require items to be
included in tax filings at different times than the items are being
reflected in the financial statements. A current liability is
recognized for the estimated taxes payable for the current year.
Deferred taxes represent the future tax consequences expected
to occur when the reported amounts of assets and liabilities are
recovered or paid. Deferred taxes are adjusted for enacted
changes in tax rates and tax laws. Valuation allowances are
recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized.
The Company does not expect material changes in the
judgments, assumptions or interpretations used to calculate the
tax provision for Fiscal 2015. However, changes in these
judgments, assumptions or interpretations may occur and could
have a material impact on the Company’s income tax provision.
As of the end of Fiscal 2015, the Company had recorded
valuation allowances of $1.6 million.
A provision for U.S. income tax has not been recorded on
undistributed net income of our non-U.S. subsidiaries earned
through October 31, 2015, which the Company has determined
to be indefinitely reinvested outside the U.S. Following a
corporate restructuring to support omnichannel growth, the
Company has provided deferred U.S. income taxes for net
income generated after October 31, 2015 from its non-U.S.
subsidiaries.
If the Company’s intention or U.S. and/or international tax law
changes in the future, there may be a material impact on the
provision for income taxes in the period the change occurs. The
amount of indefinitely reinvested net income that would be
subject to U.S. income tax upon repatriation and for which no
U.S. income taxes have been provided is $126.6 million as of
January 30, 2016.
The Company records uncertain tax positions in accordance
with ASC 740 on the basis of a two-step process in which (1)
we determine whether it is more likely than not that the tax
positions will be sustained on the basis of the technical merits
of the position and (2) for those tax positions that meet the more-
likely-than-not recognition threshold, we recognize the largest
amount of tax benefit that is more than 50 percent likely to be
realized upon ultimate settlement with the related tax authority.
Uncertain tax positions are adjusted periodically based on
currently available evidence. Changes will impact the income
tax provision and the effective tax rate in the period in which
an adjustment is made. The Company recognizes accrued
interest and penalties related to uncertain tax positions as a
component of tax expense.
Of the total amount accrued for uncertain tax positions, it is
reasonably possible that $1.25 million to $1.75 million could
change in the next 12 months due to audit settlements, expiration
of statutes of limitations or other resolution of uncertainties.
Due to the uncertain and complex application of tax laws and/
or regulations, it is possible that the ultimate resolution of audits
may result in amounts which could be different from the amount
estimated. In such case, the Company will record an adjustment
in the period in which such matters are effectively settled.
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 is probable that
a loss has been incurred and such loss is estimable. Significant
judgment may be applied in assessing the probability of loss
and in estimating the amount of such losses.
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 U.S. 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 $3.1 million,
$3.2 million and $2.6 million for Fiscal 2015, Fiscal 2014 and Fiscal 2013, respectively, recorded in interest expense, net on the
Consolidated Statements of Operations and Comprehensive Income (Loss).