Build-A-Bear Workshop 2014 Annual Report Download - page 51

(h) Other Intangible Assets
Other intangible assets consist primarily of initial costs related to
trademarks and other intellectual property. Trademarks and other
intellectual property represent third-party costs that are capitalized
and amortized over their estimated lives ranging from one to three
years using the straight-line method.
(i) Other Assets
Other assets consist primarily of deferred leasing fees, deferred costs
related to franchise agreements and trade credits. Deferred leasing
fees are initial, direct costs related to the Company’s operating leases
and are amortized over the term of the related leases. Deferred
franchise costs are initial costs related to the Company’s franchise
agreements that are deferred and amortized over the life of the
respective franchise agreement. Amortization expense related to
other assets was $0.2 million, $0.2 million and $0.3 million for 2014,
2013 and 2012, respectively. See Note 6 – Other Non-current Assets
for further discussion regarding trade credits.
(j) Long-lived Assets
Whenever facts and circumstances indicate that the carrying value
of a long-lived asset may not be recoverable, the carrying value
is reviewed. If this review indicates that the carrying value of the
asset will not be recovered, as determined based on projected
undiscounted cash flows related to the asset over its remaining life,
the carrying value of the asset is reduced to its estimated fair value.
See Note 4 – Property and Equipment and Note 6 – Other Non-
current Assets for further discussion regarding the impairment of
long-lived assets.
The calculation of fair value requires multiple assumptions regarding
our future operations to determine future cash flows, including but
not limited to, sales volume, margin rates and discount rates. If
dierent assumptions were used in the analysis, it is possible that
the amount of the impairment charge may have been significantly
dierent than what was recorded.
(k) Deferred Rent
Certain of the Company’s operating leases contain predetermined
fixed escalations of minimum rentals during the original lease terms.
For these leases, the Company recognizes the related rental expense
on a straight-line basis over the life of the lease and records the
dierence between the amounts charged to operations and amounts
paid as deferred rent. The Company also receives certain lease
incentives in conjunction with entering into operating leases. These
lease incentives are recorded as deferred rent at the beginning of
the lease term and recognized as a reduction of rent expense over
the lease term. In addition, certain of the Company’s leases contain
future contingent increases in rentals. Such increases in rental
expense are recorded in the period that it is probable that store sales
will meet or exceed the specified target that triggers contingent
rental expense.
(l) Franchises
The Company defers initial, one-time nonrefundable franchise
fees and amortizes them over the initial term of the respective
franchise agreements, which extend for periods up to 25 years. The
Company’s obligations under the contract are ongoing and include
operations and product development support and training, generally
concentrated around new store openings. Continuing franchise fees
are recognized as revenue as the fees are earned.
(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 dierence 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, the Stu Fur Stu
club, whereby guests enroll in the program and receive one point
for every dollar spent and receive awards for various discounts on
future purchases after achieving defined point thresholds. Historical
patterns for points converting into awards and ultimate award
redemption are applied to actual points and awards outstanding
at the respective balance sheet date to calculate the liability and
corresponding adjustment to net retail sales. In 2014, the Company
changed the program to eliminate certain discounts and reduced
its liability by $0.5 million with a corresponding increase to net retail
sales and a $0.4 million increase to net income.
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 2014, 2013 and 2012, the deferred revenue
liability was adjusted downward by $1.3 million, $0.1 million and $0.5
million, respectively, with corresponding increases to net retail sales.
Net income was increased by $1.2 million ($0.07 per diluted share) in
2014 and net loss was decreased by $0.1 million ($0.00 per share) and
$0.5 million ($0.03 per share), in 2013 and 2012, respectively.
(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; stung; damages and shortages; and shipping and
handling costs incurred in shipment to customers.
Notes to Consolidated Financial Statements (continued)
BUILD-A-BEAR WORKSHOP, INC. 2014 ANNUAL REPORT 39