Build-A-Bear Workshop 2014 Annual Report Download - page 40

in selling, general and administrative expenses as a component of
income (loss) before income taxes in the Retail segment. In the event
that we decide to close any or all of these stores in the future, we
may be required to record additional impairments, lease termination
fees, severance and other charges. Impairment losses in the future
are dependent on a number of factors such as site selection and
general economic trends, and thus could be significantly dierent
than historical results. The assumptions used in future calculations
of fair value may change significantly which could result in further
impairment charges in future periods.
Revenue Recognition
Revenues from retail sales, net of discounts and excluding sales tax,
are recognized at the time of sale. Merchandise 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 Stu Fur Stu® club,
whereby guests enroll in the program and receive one point for
every dollar spent. 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
for every 100 points earned in a 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 2014,
the deferred revenue liability was adjusted downward by $1.3 million.
Based on this assessment at the end of fiscal 2013 and 2012, the
deferred revenue liability was adjusted downward by $0.1 million and
$0.5 million, respectively, with a corresponding increase to net retail
sales.
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. Based on the analysis performed as of January 3,
2015, the change in our assumptions would have resulted in a $0.2
million increase in net retail sales.
Income Taxes
We recognize deferred tax assets resulting from tax credit
carryforwards and deductible temporary dierences between
taxable income on our income tax returns and income before taxes
under GAAP. Deferred tax assets generally represent future tax
benefits to be received when these carryforwards can be applied
against future taxable income or when expenses previously reported
in our Consolidated Financial Statements become deductible for
income tax purposes. A deferred tax asset valuation allowance is
required when some portion or all of the deferred tax assets may
not be realized. We are required to estimate taxable income in
future years or develop tax strategies that would enable tax asset
realization in each taxing jurisdiction and use significant judgment
to determine whether to record a deferred tax asset valuation
allowance for part or all of a deferred tax asset. We also consider
the weight of all available evidence, both positive and negative, in
assessing the realizability of the deferred tax assets. The need for
a valuation allowance is assessed by tax jurisdiction. We consider
the reversals of existing taxable temporary dierences as well as
projections of future taxable income. We consider the future reversals
of existing taxable temporary dierences to the extent they were of
the same character as the temporary dierences giving rise to the
deferred tax assets. We also consider whether the future reversals
of existing taxable temporary dierences will occur in the same
period and jurisdiction as the temporary dierences giving rise to the
deferred tax assets.
We have deferred tax assets in the UK and Canada on which we
no longer have recorded a valuation allowance. The realization
of these deferred tax assets is dependent upon the recognition of
future jurisdictional income. Based on the recent historical results,
including three years of cumulative income generated in the UK and
tax planning strategies that will be implemented in Canada, the
Company determined it was more likely than not that the deferred
tax assets would be realized. As of January 3, 2015, we performed
an analysis of all available evidence and continue to maintain a
valuation allowance on most of our domestic deferred tax assets.
Significant judgment is required in evaluating our uncertain tax
positions. We establish accruals for uncertain tax positions when we
believe that the full amount of the associated tax benefit may not be
realized. In the future, if we prevail in matters for which accruals have
been established previously or pay amounts in excess of reserves,
there could be an eect on our income tax provisions in the period in
which such determination is made. 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 January 3, 2015.
28 BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT