Hibbett Sports 2012 Annual Report Download - page 33

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Uncertain Tax Positions. We account for uncertain tax positions in accordance with ASC Topic 740, Income Taxes.
The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often
ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures.
Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our
subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and
statements of operations. See “Part II, Item 8, Consolidated Financial Statements Note 9 – Income Taxes” for additional detail
on our uncertain tax positions.
Litigation Accruals. Estimated amounts for claims that are probable and can be reasonably estimated are recorded as
liabilities in the consolidated balance sheets. The likelihood of a material change in these estimated accruals is dependent on new
claims as they may arise and the favorable or unfavorable outcome of a particular litigation. As additional information becomes
available, we assess the potential liability related to pending litigation and revise estimates as appropriate. Such revisions in
estimates of the potential liability could materially impact our results of operations and financial position.
Impairment of Long-Lived Assets. We continually evaluate whether events and circumstances have occurred that
indicate the remaining balance of long-lived assets may be impaired and not recoverable. Our policy is to adjust the remaining
useful life of depreciable assets and to recognize any impairment loss on long-lived assets as a charge to current income when
events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment is assessed
considering the estimated undiscounted cash flows over the asset’s remaining life. If estimated cash flows are insufficient to
recover the investment, an impairment loss is recognized based on a comparison of the cost of the asset to fair value less any
costs of disposition. Evaluation of asset impairment requires significant judgment and estimates.
Stock-Based Compensation. We use the Black-Scholes option-pricing model to estimate the fair value at the date of
grant of stock options granted under our stock option plans and stock purchase rights associated with the Employee Stock
Purchase Plan. Volatility is estimated as of the date of grant or purchase date based on management’s estimate of the time period
that captures the relative volatility of our stock. We base the risk-free interest rate on the annual continuously compounded risk-
free rate with a term equal to the option’s expected term. The effects on net income and earnings per share of stock-based
compensation expense, net of tax, calculated using the fair value of stock options and stock purchase rights in accordance with
the Black-Scholes option-pricing model are not necessarily representative of the effects of our results of operations in the future.
In addition, the compensation expense utilizes an option-pricing model developed for traded options with relatively short lives.
Our stock option grants have a life of up to ten years and are not transferable. Therefore, the actual fair value of a stock option
grant may be different from our estimates. We believe that our estimates incorporate all relevant information and represent a
reasonable approximation in light of the difficulties involved in valuing non-traded stock options. All estimates and assumptions
are regularly evaluated and updated when applicable.
Insurance Accruals. We use a combination of insurance and self-insurance for a number of risks including workers’
compensation, general liability, property liability and employee-related health benefits, a portion of which is paid by our
employees. The estimates and accruals for the liabilities associated with these risks are regularly evaluated for adequacy based
on the most current available information, including historical claims experience and expected future claims costs.
Leases. We lease all our retail stores, our distribution center and certain equipment, including transportation and office
equipment. We evaluate each lease at inception to determine whether the lease will be accounted for as an operating or capital
lease. The term of the lease used for this evaluation includes renewal option periods only in instances in which the exercise of
the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. The
majority of our retail stores and our distribution center are operating leases.
Many of our operating lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions.
We recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where
failure to exercise such options would result in an economic penalty. We use a time period for our straight-line rent expense
calculation that equals or exceeds the time period used for depreciation on leasehold improvements. In addition, the
commencement date of the lease term is the earlier of the date when we become legally obligated for the rent payments or the
date when we take possession of the building for initial setup of fixtures and merchandise.
We make judgments regarding the probable term for each lease, which can impact the classification and accounting for
a lease as capital or operating, the escalations in payments that are taken into consideration when calculating straight-line rent and
the term over which landlord allowances received are amortized. These judgments may produce materially different amounts of
depreciation, amortization and rent expense than would be reported in a specific period if different assumed lease terms were
used.