Build-A-Bear Workshop 2009 Annual Report Download - page 58

BUILD-A-BEAR WORKSHOP, INC. 2009 FORM 10-K
Notes to Consolidated Financial Statements (continued)
(m) Retail Revenue Recognition
Net retail sales are net of discounts, exclude sales tax,
and are recognized at the time of sale. Shipping and
handling costs billed to customers are included in net retail
sales.
Revenues from the sale of gift cards are recognized at the
time of redemption. Unredeemed gift cards are included in
gift cards and customer deposits on the consolidated balance
sheets. The company escheats a portion of unredeemed gift
cards according to Delaware escheatment regulations that
require remittance of the cost of merchandise portion of
unredeemed gift cards over five years old. The difference
between the value of gift cards and the amount escheated is
recorded as income in the consolidated statement of
operations.
The Company has an automated frequent shopper
program in North America, the Stuff Fur Stuff®club, whereby
guests enroll in the program and receive one point for every
dollar or partial dollar spent and after reaching 100 points
receive a $10 discount on a future purchase. An estimate of
the obligation related to the program, based on historical
redemption rates, is recorded as deferred revenue and a
reduction of net retail sales at the time of purchase. The
deferred revenue obligation is reduced, and a corresponding
amount is recognized in net retail sales, in the amount of and
at the time of redemption of the $10 discount.
Management uses actual redemption rates and historical
results to estimate how much revenue to defer. Management
reviews these redemption rates and assesses the adequacy of
the deferred revenue liability at the end of each fiscal quarter.
Due to the estimates involved in these assessments,
adjustments to the deferral rate are generally made no more
often than bi-annually in order to allow time for more definite
trends to emerge.
Based on the assessment at the end of fiscal 2009, no
adjustment was made to the deferral rate.
Based upon an assessment at the end of fiscal 2008, the
deferred revenue account was adjusted downward by $1.8
million, effective at the beginning of fiscal 2008, with a
corresponding increase to net retail sales, and a $1.1 million
increase in net income ($0.06 per diluted share).
Additionally, the amount of revenue being deferred for future
periods was decreased by 33 basis points as a percentage of
net retail sales (bps), to give effect to the change in
redemption experience and the increased visibility of the
redemptions with the automated system.
In 2007, the Company reduced the estimated liability by
$0.4 million. Based on the assessment at the end of fiscal
2007, no adjustment was made to the deferral rate.
(n) Cost of Merchandise Sold
Cost of merchandise sold includes the cost of the
merchandise, including royalties paid to licensors of third
party branded merchandise; store occupancy cost, including
store depreciation and store asset impairment charges; cost of
warehousing and distribution; freight costs from the
manufacturer to the store; cost of warehousing and
distribution; packaging; stuffing; damages and shortages; and
shipping and handling costs incurred in shipment to
customers.
(o) Selling, General, and Administrative Expenses
Selling, general, and administrative expenses include
store payroll and related benefits, advertising, credit card
fees, and store supplies, as well as central office management
payroll and related benefits, costs related to the review of
strategic alternatives, travel, information systems, accounting,
insurance, legal, and public relations. It also includes
depreciation and amortization of central office leasehold
improvements, furniture, fixtures, and equipment, as well as
amortization of trademarks and intellectual property.
(p) Store Preopening Expenses
Store preopening expenses, including store set-up, certain
labor and hiring costs, and rental charges incurred prior to
store openings are expensed as incurred.
(q) Advertising
The costs of advertising, promotion and marketing
programs are charged to operations in the first period the
program takes place. Advertising expense was $24.4 million,
$33.4 million and $35.2 million for fiscal years 2009, 2008
and 2007, respectively.
(r) Income Taxes
Income taxes are accounted for using a balance sheet
approach known as the asset and liability method. The asset
and liability method accounts for deferred income taxes by
applying the statutory tax rates in effect at the date of the
consolidated balance sheets to differences between the book
basis and the tax basis of assets and liabilities. The
noncurrent deferred tax is reported on a jurisdictional basis.
Accordingly, noncurrent deferred tax assets are included in
other assets, net and noncurrent deferred tax liabilities are
included in other liabilities.
The Company accounts for its total liability for uncertain
tax positions according to the provisions of ASC section
740-10-25. The Company recognizes estimated interest and
penalties related to uncertain tax positions in income tax
expense. See Note 8—Income Taxes for further discussion.
(s) Earnings (Loss) Per Share
Basic earnings (loss) per share is determined by dividing
net income or loss allocated to common stockholders by the
weighted average number of common shares outstanding
during the period. Diluted earnings or loss per share reflects
the potential dilution that could occur if options to issue
common stock were exercised. In periods in which the
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