Build-A-Bear Workshop 2013 Annual Report Download - page 38

earned up to 250 points 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
We assess the adequacy of the deferred revenue liability based upon
our review of point conversion and award redemption patterns 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 2013,
the deferred revenue liability was adjusted downward by $0.1 million,
with a corresponding increase to net retail sales, and a $0.1 million
decrease in net loss.
Based on this assessment at the end of fiscal 2012 and 2011, the
deferred revenue liability was adjusted downward by $0.5 million
and $1.5 million, respectively, with a corresponding increase to net
retail sales, and a $0.5 million and $1.5 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 28, 2013, the change in our
assumptions would have resulted in a $0.3 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 assesses the valuation
allowance recorded against deferred tax assets at the end of each
reporting period. Deferred tax assets and liabilities are recognized
for the expected tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported amounts. We
performed an analysis of all available evidence, consistent with the
provisions under the Income Taxes topic of the ASC. As of December
28, 2013, we continue to maintain a valuation allowance on most of
our deferred tax assets. The remaining net deferred tax assets as of
December 28, 2013, represent the estimated future tax benefits to be
received from taxing authorities or future reductions of taxes payable.
Under the Income Taxes topic of the ASC, in order to recognize an
uncertain tax benefit, the taxpayer must be more likely than not
of sustaining the position, and the measurement of the benefit is
calculated as the largest amount that is more than 50 percent likely
to be realized upon resolution of the benefit. Tax authorities regularly
examine the Company’s returns in the jurisdictions in which the
Company does business. Management regularly assesses the tax risk
of the Company’s return filing positions and believes its accruals
for uncertain tax benefits are adequate as of December 28, 2013 and
December 29, 2012.
Recent Accounting Pronouncements
In July 2013, the FASB issued accounting guidance requiring entities
to present unrecognized tax benefits as a reduction to any related
deferred tax assets for net operating losses, similar tax losses, or tax
credit carryforwards if such settlement is required or expected in
the event an uncertain tax position is disallowed. Currently effective
U.S. GAAP does not provide explicit guidance on the topic. This
new presentation guidance will become effective prospectively for
fiscal years, and interim periods within those years, beginning after
December 15, 2013. Accordingly, we will adopt this standard in the
first quarter of fiscal 2014. While we are evaluating the impact this
standard will have on the presentation of unrecognized tax benefits
in our consolidated balance sheet, it will not affect our results of
operations, financial condition or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Our market risks relate primarily to changes in interest rates, and
we bear this risk in two specific ways. First, our revolving credit
facility carries a variable interest rate that is tied to market indices
and, therefore, our results of operations and our cash flows can
be impacted by changes in interest rates. Outstanding balances
under our credit facility bear interest at LIBOR plus 1.8%. We had no
borrowings during fiscal 2013. Accordingly, a 100 basis point change
in interest rates would result in no material change to our annual
interest expense. The second component of interest rate risk involves
the short term investment of excess cash in short term, investment
grade interest-bearing securities. If there are changes in interest
rates, those changes would affect the investment income we earn on
these investments and, therefore, impact our cash flows and results of
operations.
We conduct operations in various countries, which expose us to
changes in foreign exchange rates. The financial results of our
foreign subsidiaries and franchisees may be materially impacted by
exposure to fluctuating exchange rates. Reported sales, costs and
expenses at our foreign subsidiaries, when translated into U.S. dollars
for financial reporting purposes, can fluctuate due to exchange rate
movement. While exchange rate fluctuations can have a material
impact on reported revenues, costs and expenses, and earnings, this
impact is principally the result of the translation effect and does not
materially impact our short-term cash flows.
Although we enter into a significant amount of purchase obligations
outside of the U.S., these obligations are settled primarily in U.S.
28 BUILD-A -BEAR WORKSHOP, INC. 2013 FORM 10 -K