Famous Footwear 2012 Annual Report Download - page 40

38 2012 BROWN SHOE COMPANY, INC. FORM 10-K
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain accounting issues require management estimates and judgments for the preparation of financial statements.
Our most significant policies requiring the use of estimates and judgments are listed below.
Revenue Recognition
Retail sales, recognized at the point of sale, are recorded net of returns and exclude sales tax. Wholesale sales and
sales through our internet sites are recorded, net of returns, allowances and discounts, when the merchandise has been
shipped and title and risk of loss have passed to the customer. Retail items sold through our internet sites are made
pursuant to a sales agreement that provides for transfer of both title and risk of loss upon our delivery to the carrier.
Reserves for projected merchandise returns, discounts and allowances are carried based on historical experience and
current expectations. Revenue is recognized on license fees related to our owned brand-names, where we are the
licensor, when the related sales of the licensee are made.
Gift Cards
We sell gift cards to our consumers in our retail stores and through our internet sites. Our gift cards do not have
expiration dates or inactivity fees. We recognize revenue from gift cards when (i) the gift card is redeemed by the
consumer, or (ii) the likelihood of the gift card being redeemed by the consumer is remote (“gift card breakage”),
and we determine that we do not have a legal obligation to remit the value of unredeemed gift cards to the relevant
jurisdictions. We determine our gift card breakage rate based upon historical redemption patterns. We recognize gift
card breakage during the 24-month period following the sale of the gift card, according to our historical redemption
pattern. Gift card breakage income is included in net sales in the consolidated statements of earnings and the liability
established upon the sale of a gift card is included in other accrued expenses within the consolidated balance sheets.
We recognized $0.5 million, $0.6 million and $0.6 million of gift card breakage in 2012, 2011 and 2010, respectively.
Inventories
Inventories are our most significant asset, representing approximately 46% of total assets at the end of 2012. We value
inventories at the lower of cost or market with 86% of consolidated inventories using the last-in, first-out (“LIFO”) method.
An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected
year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.
We apply judgment in valuing our inventories by assessing the net realizable value of our inventories based on current
selling prices. At our Famous Footwear segment, we recognize markdowns when it becomes evident that inventory
items will be sold at retail prices less than cost, plus the cost to sell the product. This policy causes gross profit rate at
Famous Footwear to be lower than the initial markup during periods when permanent price reductions are taken to clear
product. At our other divisions, we generally provide markdown reserves to reduce the carrying values of inventories to
a level where, upon sale of the product, we will realize our normal gross profit rate. We believe these policies reflect the
dierence in operating models between Famous Footwear and our other segments. Famous Footwear periodically runs
promotional events to drive sales to clear seasonal inventories. The other segments rely on permanent price reductions to
clear slower-moving inventory.
We physically count all merchandise inventory on hand at least annually and adjust the recorded balance to reflect the
results of the physical counts. We record estimated shrinkage between physical inventory counts based on historical results.
Inventory shrinkage is included as a component of cost of goods sold.
Income Taxes
We record deferred taxes for the eects of timing dierences between financial and tax reporting. These dierences relate
principally to employee benefit plans, accrued expenses, bad debt reserves, depreciation and amortization and inventory.
We evaluate our foreign investment opportunities and plans, as well as our foreign working capital needs, to determine
the level of investment required and, accordingly, determine the level of foreign earnings that we consider indefinitely
reinvested. Based upon that evaluation, earnings of our foreign subsidiaries that are not otherwise subject to United States
taxation, except for our Canadian subsidiary, are considered to be indefinitely reinvested, and accordingly, deferred taxes
have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected
when known and may result in providing residual United States deferred taxes on unremitted foreign earnings.
At February 2, 2013, we have net operating loss carryforwards at certain of our subsidiaries. We evaluate these
carryforwards for realization based upon their expiration dates and our expectations of future taxable income.
As deemed appropriate, valuation reserves are recorded to adjust the recorded value of these carryforwards to
the expected realizable value.