Neiman Marcus 2009 Annual Report Download - page 107

Table of Contents
Gift Cards. We sell gift cards at our Specialty Retail stores and through our Direct Marketing operation. Unredeemed gift
cards aggregated $32.0 million at July 31, 2010 and $30.4 million at August 1, 2009. The gift cards sold to our customers have no
stated expiration dates and, in some cases, are subject to actual and/or potential escheatment rights in various of the jurisdictions in
which we operate.
Gift card breakage recognized during fiscal years 2010 and 2009 was not significant. We do not believe gift card breakage
will have a material impact on our future operations.
Loyalty Programs. We maintain customer loyalty programs in which customers accumulate points for qualifying purchases.
Upon reaching certain levels, customers may redeem their points for gifts. Generally, points earned in a given year must be redeemed
no later than 90 days subsequent to the end of the annual program period.
The estimates of the costs associated with the loyalty programs require us to make assumptions related to customer
purchasing levels, redemption rates and costs of awards to be chosen by our customers. Our customers redeem a substantial portion of
the points earned in connection with our loyalty programs for gift cards. At the time the qualifying sales giving rise to the loyalty
program points are made, we defer the portion of the revenues on the qualifying sales transactions equal to the estimated retail value
of the gift cards to be issued upon conversion of the points to gift cards. We record the deferral of revenues related to gift card awards
under our loyalty programs as a reduction of revenues. In addition, we charge the cost of all other awards under our loyalty programs
to cost of goods sold.
Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We are routinely
under audit by federal, state or local authorities in the area of income taxes. We regularly evaluate the likelihood of realization of tax
benefits derived from positions we have taken in various federal and state filings after consideration of all relevant facts,
circumstances and available information. For those tax benefits we believe more likely than not will be sustained, we recognize the
benefit we believe is cumulatively greater than 50% likely to be realized. To the extent we were to prevail in matters for which
accruals have been established or be required to pay amounts in excess of recorded reserves, our effective tax rate in a given financial
statement period could be materially impacted.
Fair Value Measurements. Under generally accepted accounting principles, we are required 1) to measure certain assets and
liabilities at fair value or 2) to disclose the fair value of certain assets and liabilities recorded at cost. Pursuant to these fair value
measurement and disclosure requirements, fair value is defined as the price that would be received upon sale of an asset or paid upon
transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most
advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants would use in
pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities includes consideration of
non-performance risk, including our own credit risk. Each fair value measurement is reported in one of the following three levels:
• Level 1 — valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
• Level 2 — valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
• Level 3 — valuation inputs are unobservable and typically reflect management's estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models and similar techniques.
At July 31, 2010 and August 1, 2009, the fair values of cash and cash equivalents, receivables and accounts payable
approximated their carrying values due to the short-term nature of these instruments. See Notes 7, 8 and 13 to the consolidated
financial statements for the estimated fair values of our long-term debt, derivative financial instruments and Pension Plan investments.
F-14