Lululemon 2011 Annual Report Download - page 47

Table of Contents
For financial reporting purposes, we generally provide taxes at the rate applicable for the appropriate tax jurisdiction. Because our present
intention is to reinvest the unremitted earnings in our foreign operations, we do not provide U.S. income taxes on unremitted earnings of foreign
subsidiaries. Management periodically assesses the need to utilize these unremitted earnings to finance our foreign operations. This assessment is
based on cash flow projections that are the result of estimates of future production, fiscal requirements by tax jurisdiction of our operations and
operational and fiscal objectives by tax jurisdiction for our operations. Such estimates are inherently imprecise since many assumptions utilized
in the cash flow projections are subject to revision in the future.
We file income tax returns in the United States, Canada and various foreign and state jurisdictions. We are subject to income tax
examination by tax authorities in all jurisdictions from our inception to date. Our policy is to recognize interest expense and penalties related to
income tax matters as a selling, general and administrative expense. At January 29, 2012, we do not have any significant accruals for interest
related to unrecognized tax benefits or tax penalties. Our intercompany transfer pricing policies are currently subject to audits by various foreign
tax jurisdictions. Although we believe that our intercompany transfer pricing policies and tax positions are reasonable, the final determination of
tax audits or potential tax disputes may be materially different from that which is reflected in our income tax provisions and accruals.
Goodwill and Intangible Assets. Intangible assets are recorded at cost. Non-competition agreements are amortized on a straight-line basis
over their estimated useful life of five years. Reacquired franchise rights are amortized on a straight-
line basis over their estimated useful lives of
10 years. Goodwill represents the excess of the purchase price over the fair market value of identifiable net assets acquired and is not amortized.
Goodwill and intangible assets with indefinite useful lives are tested for impairment annually or more frequently when an event or circumstance
indicates that goodwill or indefinite useful live intangible assets might be impaired. We use our best estimates and judgment based on available
evidence in conducting the impairment testing. When the carrying amount exceeds the fair value, an impairment loss is recognized in an amount
equal to the excess of the carrying value over its fair market value.
Stock-Based Compensation. We account for stock-based compensation using the fair value method. The fair value of awards granted is
estimated at the date of grant and recognized as employee compensation expense on a straight-line basis over the requisite service period with
the offsetting credit to additional paid-in capital. Our calculation of stock-based compensation requires us to make a number of complex and
subjective estimates and assumptions, including future forfeitures, stock price volatility, expected life of the options and related tax effects. The
estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts
will be recorded as a cumulative adjustment in the period estimates are revised. We consider several factors when estimating expected
forfeitures, such as types of awards, size of option holder group and anticipated employee retention. Actual results may differ substantially from
these estimates. Expected volatility of the stock is based on our review of companies we believe of similar growth and maturity and our peer
group in the industry in which we do business because we do not have sufficient historical volatility data for our own stock. The expected term
of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to
be outstanding. In the future, as we gain historical data for volatility in our own stock and the actual term employees hold our options, expected
volatility and expected term may change which could substantially change the grant-date fair value of future awards of stock options and,
ultimately, the expense we record. For awards with service and/or performance conditions, the total amount of compensation expense to be
recognized is based on the number of awards that are expected to vest and is adjusted to reflect those awards that do ultimately vest. For awards
with performance conditions, we recognize the compensation expense over the requisite service period as determined by a range of probability
weighted outcomes. For awards with market and or performance conditions, all compensation expense is recognized if it is probable that the
underlying market or performance conditions will be fulfilled. Certain employees are entitled to share-based awards from one of our principal
stockholders. These awards are accounted for as employee compensation expense in accordance with the above noted policies.
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