Nike 2013 Annual Report Download - page 50

PART II
NOTE 1 — Summary of Significant Accounting Policies
Description of Business
NIKE, Inc. is a worldwide leader in the design, development and worldwide
marketing and selling of athletic footwear, apparel, equipment, accessories
and services. Wholly-owned NIKE, Inc. subsidiaries include Converse Inc.,
which designs, markets and distributes casual footwear, apparel and
accessories and Hurley International LLC, which designs, markets and
distributes action sports and youth lifestyle footwear, apparel and
accessories.
Basis of Consolidation
The consolidated financial statements include the accounts of NIKE, Inc. and
its subsidiaries (the “Company”). All significant intercompany transactions and
balances have been eliminated.
The Company completed the sale of Cole Haan during the third quarter
ended February 28, 2013 and completed the sale of Umbro during the
second quarter ended November 30, 2012. As a result, the Company reports
the operating results of Cole Haan and Umbro in the net income (loss) from
discontinued operations line in the consolidated statements of income for all
periods presented. In addition, the assets and liabilities associated with these
businesses are reported as assets of discontinued operations and liabilities
of discontinued operations, as appropriate, in the consolidated balance
sheets (refer to Note 15 — Discontinued Operations). Unless otherwise
indicated, the disclosures accompanying the consolidated financial
statements reflect the Company’s continuing operations.
On November 15, 2012, the Company announced a two-for-one split of both
NIKE Class A and Class B Common shares. The stock split was a 100
percent stock dividend payable on December 24, 2012 to shareholders of
record at the close of business December 10, 2012. Common stock began
trading at the split-adjusted price on December 26, 2012. All share numbers
and per share amounts presented reflect the stock split.
Recognition of Revenues
Wholesale revenues are recognized when title and the risks and rewards of
ownership have passed to the customer, based on the terms of sale. This
occurs upon shipment or upon receipt by the customer depending on the
country of the sale and the agreement with the customer. Retail store
revenues are recorded at the time of sale. Provisions for post-invoice sales
discounts, returns and miscellaneous claims from customers are estimated
and recorded as a reduction to revenue at the time of sale. Post-invoice sales
discounts consist of contractual programs with certain customers or
discretionary discounts that are expected to be granted to certain customers
at a later date. Estimates of discretionary discounts, returns and claims are
based on historical rates, specific identification of outstanding claims and
outstanding returns not yet received from customers, and estimated
discounts, returns and claims expected but not yet finalized with
customers. As of May 31, 2013 and 2012, the Company’s reserve balances
for post-invoice sales discounts, returns and miscellaneous claims were $531
million and $455 million, respectively.
Cost of Sales
Cost of sales consists primarily of inventory costs, as well as warehousing
costs (including the cost of warehouse labor), third party royalties, certain
foreign currency hedge gains and losses, and research, design and
development costs.
Shipping and Handling Costs
Shipping and handling costs are expensed as incurred and included in cost of
sales.
Operating Overhead Expense
Operating overhead expense consists primarily of payroll and benefit related
costs, rent, depreciation and amortization, professional services, and
meetings and travel.
Demand Creation Expense
Demand creation expense consists of advertising and promotion costs,
including costs of endorsement contracts, television, digital and print
advertising, brand events, and retail brand presentation. Advertising
production costs are expensed the first time an advertisement is run.
Advertising placement costs are expensed in the month the advertising
appears, while costs related to brand events are expensed when the event
occurs. Costs related to retail brand presentation are expensed when the
presentation is completed and delivered.
A significant amount of the Company’s promotional expenses result from
payments under endorsement contracts. Accounting for endorsement
payments is based upon specific contract provisions. Generally,
endorsement payments are expensed on a straight-line basis over the term of
the contract after giving recognition to periodic performance compliance
provisions of the contracts. Prepayments made under contracts are included
in prepaid expenses or other assets depending on the period to which the
prepayment applies.
Some of the contracts provide for contingent payments to endorsers based
upon specific achievements in their sports (e.g., winning a championship).
The Company records selling and administrative expense for these amounts
when the endorser achieves the specific goal.
Some of the contracts provide for payments based upon endorsers
maintaining a level of performance in their sport over an extended period of
time (e.g., maintaining a top ranking in a sport for a year). These amounts are
recorded in selling and administrative expense when the Company
determines that it is probable that the specified level of performance will be
maintained throughout the period. In these instances, to the extent that actual
payments to the endorser differ from our estimate due to changes in the
endorser’s athletic performance, increased or decreased selling and
administrative expense may be recorded in a future period.
Some of the contracts provide for royalty payments to endorsers based upon
a predetermined percentage of sales of particular products. The Company
expenses these payments in cost of sales as the related sales occur. In
certain contracts, the Company offers minimum guaranteed royalty
payments. For contractual obligations for which the Company estimates it will
not meet the minimum guaranteed amount of royalty fees through sales of
product, the Company records the amount of the guaranteed payment in
excess of that earned through sales of product in selling and administrative
expense uniformly over the remaining guarantee period.
Through cooperative advertising programs, the Company reimburses retail
customers for certain costs of advertising the Company’s products. The
Company records these costs in selling and administrative expense at the
point in time when it is obligated to its customers for the costs, which is when
the related revenues are recognized. This obligation may arise prior to the
related advertisement being run.
Total advertising and promotion expenses were $2,745 million, $2,607
million, and $2,344 million for the years ended May 31, 2013, 2012 and 2011,
respectively. Prepaid advertising and promotion expenses recorded in
prepaid expenses and other current assets totaled $386 million and $281
million at May 31, 2013 and 2012, respectively.
Cash and Equivalents
Cash and equivalents represent cash and short-term, highly liquid investments,
including commercial paper, U.S. treasury, U.S. agency, and corporate debt
securities with maturities of three months or less at date of purchase.
NIKE, INC. 2013 Annual Report and Notice of Annual Meeting 95
FORM 10-K