Dillard's 2015 Annual Report Download - page 53

F-11
various assumptions, which include, but are not limited to, the Company's historical loss experience, projected loss
development factors, actual payroll and other data. The required liability is also subject to adjustment in the future based upon
the changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per
incident (severity). These insurance accruals are recorded in trade accounts payable and accrued expenses and other liabilities
on the consolidated balance sheets.
Operating Leases—The Company leases retail stores, office space and equipment under operating leases. Many store
leases contain construction allowance reimbursements by landlords, rent holidays, rent escalation clauses and/or contingent rent
provisions. The Company recognizes the related rental expense on a straight-line basis over the lease term and records the
difference between the amounts charged to expense and the rent paid as a deferred rent liability.
To account for construction allowance reimbursements from landlords and rent holidays, the Company records a deferred
rent liability in other liabilities on the consolidated balance sheets and amortizes the deferred rent over the lease term, as a
reduction to rent expense on the consolidated income statements. For leases containing rent escalation clauses, the Company
records minimum rent expense on a straight-line basis over the lease term on the consolidated income statement. The lease term
used for lease evaluation includes renewal option periods only in instances in which the exercise of the option period can be
reasonably assured and failure to exercise such options would result in an economic penalty.
Revenue Recognition—The Company's retail operations segment recognizes merchandise revenue at the "point of sale."
Allowance for sales returns are recorded as a component of net sales in the period in which the related sales are recorded. Sales
taxes collected from customers are excluded from revenue and are recorded in trade accounts payable and accrued expenses
until remitted to the taxing authorities.
Synchrony Financial ("Synchrony"; formerly GE Consumer Finance ) owned and managed Dillard's private label credit
cards under a long-term marketing and servicing alliance ("Synchrony Alliance") that expired in November 2014. Following
the scheduled expiration, Wells Fargo Bank, N.A. ("Wells Fargo") purchased the Dillard's private label credit card portfolio
from Synchrony and began managing Dillard's private label cards under a new 10-year agreement ("Wells Fargo Alliance").
The Company's share of income earned under the Wells Fargo Alliance and former Synchrony Alliance is included as a
component of service charges and other income. The Company received income of approximately $105 million, $112 million
and $113 million from the alliances in fiscal 2015, 2014 and 2013, respectively. The Company participates in the marketing of
the private label cards and accepts payments on the private label cards in its stores as a convenience to customers who prefer to
pay in person rather than by mailing their payments to Wells Fargo.
Revenue from CDI construction contracts is generally recognized by applying percentages of completion for each period
to the total estimated profits for the respective contracts. The length of each contract varies but is typically nine to eighteen
months. The percentages of completion are determined by relating the actual costs of work performed to date to the current
estimated total costs of the respective contracts. When the estimate on a contract indicates a loss, the entire loss is recorded in
the current period.
Gift Card Revenue Recognition—The Company establishes a liability upon the sale of a gift card. The liability is
relieved and revenue is recognized when gift cards are redeemed for merchandise. Gift card breakage income is determined
based upon historical redemption patterns. The Company uses a homogeneous pool to recognize gift card breakage and will
recognize income over the period when the likelihood of the gift card being redeemed is remote and the Company determines
that it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdiction as abandoned
property. At that time, the Company will recognize breakage income over the performance period for those gift cards (i.e. 60
months) and will record it in service charges and other income. As of January 30, 2016 and January 31, 2015 , gift card
liabilities of $60.0 million and $60.2 million, respectively, were included in trade accounts payable and accrued expenses and
other liabilities.
Advertising—Advertising and promotional costs, which include newspaper, magazine, Internet, broadcast and other
media advertising, are expensed as incurred and were approximately $50 million, $56 million and $65 million, net of
cooperative advertising reimbursements of $29.3 million, $31.6 million and $34.1 million for fiscal years 2015, 2014 and 2013,
respectively. The Company records net advertising expenses in selling, general and administrative expenses.
Income Taxes—Income taxes are recognized for the amount of taxes payable for the current year and deferred tax assets
and liabilities for the future tax consequence of events that have been recognized differently in the financial statements than for
tax purposes. Deferred tax assets and liabilities are established using statutory tax rates and are adjusted for tax rate changes.
Tax positions are analyzed to determine whether it is "more likely than not" that a tax position will be sustained upon
examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. For
those tax positions where it is not "more likely than not" that a tax benefit will be sustained, no tax benefit is recognized. The