GameStop 2012 Annual Report Download - page 47

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Revenue Recognition. Revenue from the sales of the Company’s products is recognized at the time of
sale, net of sales discounts, reduced by a provision for sales returns. Our sales return reserve, which
represents the gross profit effect of sales returns, is estimated based on historical return levels. The sales of
pre-owned video game products are recorded at the retail price charged to the customer. Advertising
revenues for Game Informer are recorded upon release of magazines for sale to consumers. Subscription
revenues for the Company’s PowerUp Rewards loyalty program and magazines are recognized on a
straight-line basis over the subscription period. Revenue from the sales of product replacement plans is
recognized on a straight-line basis over the coverage period. Gift cards sold to customers are recognized as a
liability on the consolidated balance sheet until redeemed or until a reasonable point at which breakage
related to non-redemption can be recognized.
The Company sells a variety of digital products which generally allow consumers to download
software or play games on the internet. Certain of these products do not require the Company to purchase
inventory or take physical possession of, or take title to, inventory. When purchasing these products from
the Company, consumers pay a retail price and the Company earns a commission based on a percentage of
the retail sale as negotiated with the product publisher. The Company recognizes this commission as
revenue on the sale of these digital products.
Stock-Based Compensation. The Company records stock-based compensation expense in earnings
based on the grant-date fair value of options or restricted stock granted. As of February 2, 2013, the
unrecognized compensation expense related to the unvested portion of our restricted stock was
$24.2 million, which is expected to be recognized over a weighted average period of 2.0 years. As of
February 2, 2013, there was no unrecognized compensation expense related to our stock options. Note 1 and
Note 14 of “Notes to Consolidated Financial Statements” provide additional information on stock-based
compensation.
Merchandise Inventories. Our merchandise inventories are carried at the lower of cost or market
generally using the average cost method. Under the average cost method, as new product is received from
vendors, its current cost is added to the existing cost of product on-hand and this amount is re-averaged over
the cumulative units. Pre-owned video game products traded in by customers are recorded as inventory at
the amount of the store credit given to the customer. In valuing inventory, management is required to make
assumptions regarding the necessity of reserves required to value potentially obsolete or over-valued items
at the lower of cost or market. Management considers quantities on hand, recent sales, potential price
protections and returns to vendors, among other factors, when making these assumptions. Our ability to
gauge these factors is dependent upon our ability to forecast customer demand and to provide a well-
balanced merchandise assortment. Any inability to forecast customer demand properly could lead to
increased costs associated with inventory markdowns. We also adjust inventory based on anticipated
physical inventory losses or shrinkage. Physical inventory counts are taken on a regular basis to ensure the
reported inventory is accurate. During interim periods, estimates of shrinkage are recorded based on
historical losses in the context of current period circumstances.
Property and Equipment. Property and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation on furniture, fixtures and equipment is computed using the straight-line
method over estimated useful lives (ranging from two to ten years). Maintenance and repairs are expensed
as incurred, while betterments and major remodeling costs are capitalized. Leasehold improvements are
capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective
leases, including renewal options in which the exercise of the option is reasonably assured (generally
ranging from three to ten years). Costs incurred to third parties in purchasing management information
systems are capitalized and included in property and equipment. These costs are amortized over their
estimated useful lives from the date the systems become operational. The Company periodically reviews its
property and equipment whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable or their depreciation or amortization periods should be accelerated. The Company
assesses recoverability based on several factors, including management’s intention with respect to its stores
and those stores’ projected undiscounted cash flows. An impairment loss is recognized for the amount by
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