Build-A-Bear Workshop 2011 Annual Report Download - page 59

BUILD-A-BEAR WORKSHOP, INC. 2011 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 the escheatment regulations of the relevant
authority that generally 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 a customer loyalty 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 patterns, is recorded as deferred revenue and a
reduction of net retail sales. 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 certificate.
Throughout fiscal 2010, the Company continued to use
the deferral rate established at the end of fiscal 2008 to
estimate the appropriate amount of revenue to defer and
thereby the related liability. This rate, which was based on
actual redemption rates and historical results, was applied to
eligible purchases of Stuff Fur Stuff Club members at the time
of the transaction. For the December 31, 2011 and
January 1, 2011 balance sheets, historical rates for points
converting into certificates and ultimate certificate redemption
were applied to actual points and certificates outstanding at
the respective balance sheet date to calculate the liability and
corresponding adjustment to net retail sales. Management
reviews these patterns 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 historical rates are generally made no more
often than annually in order to allow time for more definite
trends to emerge.
Based on the assessment at the end of 2011, the
deferred revenue liability was adjusted downward by
$1.5 million, with a corresponding increase to net retail sales,
and a $0.9 million increase in net income.
Based on the assessment at the end of 2010, the
deferred revenue liability was adjusted downward by
$4.3 million, with a corresponding increase to net retail sales,
and a $2.6 million increase in net income.
Based on the assessment at the end of fiscal 2009, 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; 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, store supplies and store closing costs, as well as central
office management payroll and related benefits, 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 and marketing programs are
charged to operations in the first period the program takes
place. Advertising expense was $19.3 million, $18.5 million
and $24.4 million for fiscal years 2011, 2010 and
2009, 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.
Tax positions are reviewed at least quarterly and
adjusted as new information becomes available. The
recoverability of deferred tax assets is evaluated by assessing
the adequacy of future expected taxable income from all
sources, including reversal of taxable temporary differences,
forecasted operating earnings and available tax planning
strategies. These estimates of future taxable income inherently
require significant judgment. To the extent it is considered
more likely than not that a deferred tax asset will be not
recovered, a valuation allowance is established.
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