Coach 2014 Annual Report Download - page 63

TABLE OF CONTENTS
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20% and 50% of the investee, however, other factors are considered, such as board representation and the rights to participate in the day-to-day operations of
the business.
Additionally, GAAP requires the consolidation of all entities for which a Company has a controlling voting interest and all variable interest entities
(“VIEs”) for which a Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the following criteria: (i) the entity has
insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make
significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected
losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the
investor with disproportionately few voting rights.
From time to time, Coach may make an investment that requires judgment in determining whether the entity is a VIE. If it is determined that the entity is
a VIE, the Company must assess whether it is the primary beneficiary.
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Financial instruments that potentially expose Coach to concentration of credit risk consist primarily of cash and cash equivalents, investments and
accounts receivable. The Company places its cash investments with high-credit quality financial institutions and currently invests primarily in U.S.
government and agency debt securities, municipal government and corporate debt securities, bank deposits, and money market instruments placed with
major banks and financial institutions. Accounts receivable is generally diversified due to the number of entities comprising Coach’s customer base and their
dispersion across many geographical regions. The Company believes no significant concentration of credit risk exists with respect to these investments and
accounts receivable.
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The Company’s inventories are reported at the lower of cost or market. Inventory costs include material, conversion costs, freight and duties and are
determined by the first-in, first-out method. The Company reserves for slow-moving and aged inventory based on historical experience, current product
demand and expected future demand. A decrease in product demand due to changing customer tastes, buying patterns or increased competition could impact
Coach’s evaluation of its slow-moving and aged inventory and additional reserves might be required.
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Property and equipment, net is stated at cost less accumulated depreciation including the impact long-lived asset impairment and disposals. Depreciation
is calculated on a straight-line basis over the estimated useful lives of the assets. Buildings are depreciated over 40 years. Machinery and equipment are
depreciated over lives of five to seven years, furniture and fixtures are depreciated over lives of three to five years, and computer software is depreciated over
lives of three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Maintenance
and repair costs are charged to earnings as incurred while expenditures for major renewals and improvements are capitalized.
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Long-lived assets, such as property and equipment, are evaluated for impairment whenever events or circumstances indicate that the carrying value of the
assets may not be recoverable. The evaluation is based on a review of forecasted operating cash flows and the profitability of the related asset group. An
impairment loss is recognized if the forecasted cash flows are less than the carrying amount of the asset. Similar to prior fiscal years, when assessing store
assets for impairment in fiscal 2014, the Company analyzed the cash flows at an individual store-by-store level, which is the lowest level for identifiable cash
flows. The Company recorded impairment losses of $35,544 in fiscal 2014 and $16,624 in fiscal 2013. The Company did not record any impairment losses in
fiscal 2012.
In determining future cash flows, Coach takes various factors into account, including changes in merchandising strategy, the emphasis on retail store cost
controls, the effects of macroeconomic trends such as consumer spending, the impacts of the experienced level of retail store managers, the level of
advertising, promotional cadence and in-store capital investments. Since the determination of future cash flows is an estimate of future performance, there
may be future impairments in the event that future cash flows do not meet expectations.
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The Company’s leases for office space, retail locations and distribution facilities are accounted for as operating leases. Certain of the Company's leases
contain renewal options, rent escalation clauses, and/or landlord incentives. Renewal terms generally reflect market rates at the time of renewal. Rent expense
for noncancelable operating leases with scheduled rent increases and/or
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