Coach 2006 Annual Report Download - page 35

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

manufacturers of other consumer products that incorporate the Coach brand. Revenue earned under these contracts is recognized based upon
reported sales from the licensee. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis and
therefore excluded from revenue.

Advertising costs include expenses related to direct marketing activities, such as catalogs, as well as media and production costs. In
fiscal 2007, 2006 and 2005, advertising expenses totaled $47,287, $35,887 and $39,038, respectively, and are included in selling, general
and administrative expenses. Advertising costs are expensed when the advertising first appears.

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date
fair value of the award. The grant-date fair value of the award is recognized as compensation expense over the vesting period.

Shipping and handling costs incurred were $28,142, $19,927 and $16,188 in fiscal years 2007, 2006 and 2005, respectively, and
are included in selling, general and administrative expenses.

The Company accounts for income taxes in accordance with SFAS 109, “Accounting for Income Taxes.” Under SFAS 109, a deferred
tax liability or asset is recognized for the estimated future tax consequences of temporary differences between the carrying amounts of assets
and liabilities in the financial statements and their respective tax bases. Coach does not provide for U.S. income taxes on the unremitted
earnings of its foreign subsidiaries as the Company intends to permanently reinvest these earnings.

Minority interest in the statements of income represents Sumitomo Corporation’s share of the earnings in Coach Japan prior to the July
1, 2005 purchase of Sumitomo’s 50% interest in Coach Japan.

The Company has evaluated its Industrial Revenue Bond and believes, based on the interest rate, related term and maturity, that the fair
value of such instrument approximates its carrying amount. As of June 30, 2007 and July 1, 2006, the carrying values of cash and cash
equivalents, investments, trade accounts receivable, accounts payable and accrued liabilities approximated their values due to the short-term
maturities of these accounts. See Note 6, “Investments,” for the fair values of the Company’s investments as of June 30, 2007 and July 1,
2006.
Coach Japan enters into foreign currency contracts that hedge certain U.S. dollar denominated inventory purchases and its fixed rate
intercompany loan. These contracts qualify for hedge accounting and have been designated as cash flow hedges. The fair value of these
contracts is recorded in other comprehensive income and recognized in earnings in the period in which the hedged item is also recognized in
earnings. The fair value of the foreign currency derivative is based on its market value as determined by an independent party. However,
considerable judgment is required in developing estimates of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that Coach could settle in a current market exchange. The use of different market assumptions or methodologies
could affect the estimated fair value.
45






The functional currency of the Company’s foreign operations is the applicable local currency. Assets and liabilities are translated into
U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted-
average exchange rates for the period. The resulting translation adjustments are recorded as a component of accumulated other
comprehensive income (loss) within stockholders’ equity.

Basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding during the
period. Diluted net income per share is calculated similarly but includes potential dilution from the exercise of stock options and stock
awards.