Lululemon 2011 Annual Report Download - page 58

Table of Contents
not be recoverable as measured by comparing their carrying value to the estimated undiscounted future cash flows generated by their use and
eventual disposition. Impaired assets are recorded at fair value, determined principally by discounting the future cash flows expected from their
use and eventual disposition. Reductions in asset values resulting from impairment valuations are recognized in income in the period that the
impairment is determined. Long-lived assets, including intangible assets with finite lives, held for sale are reported at the lower of the carrying
value of the asset and fair value less cost to sell. Any write-downs to reflect fair value less selling cost is recognized in income when the asset is
classified as held for sale. Gains or losses on assets held for sale and asset dispositions are included in provision for impairment and lease exit
costs.
Leased property and equipment
The Company leases corporate-owned stores and distribution centers and administrative offices. Minimum rental payments, including any
fixed escalation of rental payments and rent premiums, are amortized on a straight-line basis over the life of the lease beginning on the
possession date. Rental costs incurred during a construction period, prior to store opening, are recognized as rental expense. The difference
between the recognized rental expense and the total rental payments paid is reflected on the consolidated balance sheet as a deferred lease
liability or a prepaid lease asset.
Deferred lease inducements, which include leasehold improvements paid for by the landlord and free rent, are recorded as liabilities on the
consolidated balance sheet and recognized as a reduction of rent expense on a straight-line basis over the term of the lease.
Contingent rental payments based on sales volumes are recorded in the period in which the sales occur.
The Company recognizes a liability for the fair value of a required asset retirement obligation (“ARO”) when such obligation is incurred.
The Company’s AROs are primarily associated with leasehold improvements which, at the end of a lease, the Company is contractually
obligated to remove in order to comply with the lease agreement. At the inception of a lease with such conditions, the Company records an ARO
liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. The liability is estimated based on a
number of assumptions requiring management’
s judgment, including store closing costs, cost inflation rates and discount rates, and is accreted to
its projected future value over time. The capitalized asset is depreciated using the convention for depreciation of leasehold improvement assets.
Upon satisfaction of the ARO conditions, any difference between the recorded ARO liability and the actual retirement costs incurred is
recognized as an operating gain or loss in the consolidated statements of operations.
The Company recognizes a liability for a cost associated with a lease exit or disposal activity when such obligation is incurred. A lease exit
or disposal activity is measured initially at its fair value in the period in which the liability is incurred. The Company estimates fair value at the
cease-use date of its operating leases as the remaining lease rentals, reduced by estimated sublease rentals that could be reasonably obtained for
the property, even where the Company does not intend to enter into a sublease. Estimating the cost of certain lease exit costs involves subjective
assumptions, including the time it would take to sublease the leased location and the related potential sublease income. The estimated accruals
for these costs could be significantly affected if future experience differs from that used in the initial estimate. Lease exit costs are included in
provision for impairment and lease exit costs.
Deferred revenue
Receipts from the sale of gift cards are treated as deferred revenue. Amounts received in respect of gift cards are recorded as unredeemed
gift card liability. When gift cards are redeemed for apparel, the Company recognizes the related revenue.
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