American Eagle Outfitters 2009 Annual Report Download - page 22

We evaluate our investments for impairment in accordance with ASC 320, Investments — Debt and Equity
Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired,
whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered
impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to
evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an
impairment loss is recognized in the Consolidated Statement of Operations equal to the difference between the
investment’s cost and its fair value. As of May 3, 2009, we adopted ASC 320-10-65, Transition Related to FSP
FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary-Impairments (“ASC 320-10-
65”), which modifies the requirements for recognizing other-than-temporary impairment (“OTTI”) and changes the
impairment model for debt securities. In addition, ASC 320-10-65 requires additional disclosures relating to debt
and equity securities both in the interim and annual periods as well as requires us to present total OTTI in the
Consolidated Statements of Operations, with an offsetting reduction for any non-credit loss impairment amount
recognized in other comprehensive income (“OCI”).
Share-Based Payments. We account for share-based payments in accordance with the provisions of ASC
718, Compensation — Stock Compensation (“ASC 718”). To determine the fair value of our stock option awards,
we use the Black-Scholes option pricing model, which requires management to apply judgment and make
assumptions to determine the fair value of our awards. These assumptions include estimating the length of time
employees will retain their vested stock options before exercising them (the “expected term”) and the estimated
volatility of the price of our common stock over the expected term.
We calculate a weighted-average expected term based on historical experience. Expected stock price volatility
is based on a combination of historical volatility of our common stock and implied volatility. We chose to use a
combination of historical and implied volatility as we believe that this combination is more representative of future
stock price trends than historical volatility alone. Changes in these assumptions can materially affect the estimate of
the fair value of our share-based payments and the related amount recognized in our Consolidated Financial
Statements.
Income Taxes. We calculate income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which
requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing
assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and
liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published
guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is
established against the deferred tax assets when it is more likely than not that some portion or all of the deferred
taxes may not be realized. Changes in our level and composition of earnings, tax laws or the deferred tax valuation
allowance, as well as the results of tax audits may materially impact the effective tax rate.
Effective February 4, 2007, we adopted the accounting pronouncement now codified in ASC 740 regarding
accounting for unrecognized tax benefits. This pronouncement prescribes a comprehensive model for recognizing,
measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax
return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit
from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from
an uncertain position and to establish a valuation allowance require management to make estimates and assump-
tions. The Company believes that its assumptions and estimates are reasonable, although actual results may have a
positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net
income.
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