Build-A-Bear Workshop 2012 Annual Report Download - page 44

BUILD-A-BEAR WORKSHOP, INC. 2012 FORM 10-K
Goodwill
We record goodwill related to the excess of the purchase
price over the fair value of net identifiable assets acquired.
All of our recorded goodwill, which is associated with our
acquisition of our operations in the United Kingdom, is
recorded in the European reporting unit. Goodwill is subject
to periodic evaluation for impairment when circumstances
warrant, or at least once per year. We perform our annual
impairment assessment as of the end of the fourth quarter
of each year. Impairment is tested in accordance with ASC
section 350-20-35, by comparison of the carrying value
of the reporting unit to its estimated fair value and a
reconciliation of the fair value to our overall market
capitalization. As there are not quoted prices for our reporting
unit, fair value is estimated based upon a present value
technique using estimated discounted future cash flows,
forecasted over the reasonably assured lease terms for retail
stores, with growth rates forecasted for the reporting unit and
using a credit adjusted discount rate. We use current results,
trends, future prospects, and other economic factors as the
basis for expected future cash flows. Additionally, we are
required to reconcile the fair value of the reporting unit to our
overall market capitalization. In 2012, we performed our
annual evaluation of our goodwill as of December 29, 2012.
As a result of the sustained decline in the market price of our
common stock, coupled with the decline in the performance of
the UK reporting unit, we determined that the fair value of the
reporting unit, estimated using discounted cash flow analysis
and reconciled to our market capitalization, was less than its
carrying value. As a result, we recognized an impairment
charge for the entire balance of goodwill in the 2012 fourth
quarter. This does not change our long-term outlook for the
UK reporting unit.
Revenue Recognition
Revenues from retail sales, net of discounts and excluding
sales tax, are recognized at the time of sale. Guest returns
have not been significant. Revenues from gift cards are
recognized at the time of redemption. Unredeemed gift
cards are included in current liabilities on the consolidated
balance sheets.
We have a customer loyalty program, the Stuff Fur Stuff
club, whereby guests enroll in the program and receive one
point for every dollar. Points accumulate and expire after
12 months of inactivity. In North America, guests receive a
coupon for free merchandise after reaching 50 points and a
$10 reward certificate after reaching 100 points. Additional
awards are earned for each additional 50 points earned in
the 12 month period. In the UK, guests receive a £5 certificate
for every 50 points they earn. 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 awards.
We review redemption patterns and assess 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 this assessment at the end of fiscal
2012, the deferred revenue liability was adjusted downward
by $0.5 million, with a corresponding increase to net retail
sales, and a $0.5 million decrease in net loss.
Based on this assessment at the end of fiscal 2011 and
2010, the deferred revenue liability was adjusted downward
by $1.5 million and $4.3 million, respectively, with a
corresponding increase to net retail sales, and a $0.9 million
and $2.6 million decrease in net loss, respectively.
The calculation of fair value could increase or decrease
depending on changes in the inputs and assumptions used,
specifically, expected conversion and redemption rates. In
order to evaluate the sensitivity of the estimates used in the
recognition of deferred revenue, we applied a hypothetical
increase of 100 bps in the conversion and redemption rates
which we believe is appropriate. Based on the analysis
performed as of December 29, 2012, the change in our
assumptions would have resulted in a $0.4 million reduction
of net retail sales.
Income Taxes
Our income tax expense is based on our income, statutory tax
rates, and tax planning opportunities available in the various
jurisdictions in which we operate. Tax laws are complex and
subject to different interpretations by the taxpayer and
respective governmental taxing authorities. Significant
judgment is required in determining our income tax expense
and in evaluating our tax positions, including evaluating
uncertainties. Management reviews tax positions at least
quarterly and adjusts the balances as new information
becomes available. Deferred income tax assets represent
amounts available to reduce income taxes payable on taxable
income in future years. Such assets arise because of
temporary differences between the financial reporting and tax
bases of assets and liabilities, as well as from net operating
loss and tax credit carryforwards. We performed an analysis
of all available evidence, both positive and negative,
consistent with the provisions of ASC 740-10-30-17. In the
fiscal 2012 and 2011 fourth quarters, the Company recorded
a valuation allowance on its deferred tax assets of
$4.7 million and $15.6 million, respectively. The 2012
charge related to deferred tax assets in the UK and Canada,
while the 2011 charge related the deferred tax assets in the
United States. This allowance does not preclude us from
utilizing the deferred tax assets in the future, nor does it reflect
a change in our long-term outlook.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recently issued but not yet adopted accounting
pronouncements that are expected to significantly impact our
financial statements.
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