Pep Boys 2010 Annual Report Download - page 103

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2011, January 30, 2010 and January 31, 2009
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
payroll costs for employees devoting time to the software projects. These costs are amortized over a
period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred
during the preliminary project stage, as well as maintenance and training costs are expensed as
incurred.
TRADE PAYABLE PROGRAM LIABILITY In April 2009, the Company replaced the previously
existing trade payable program with a new program which is funded by various bank participants who
have the ability, but not the obligation, to purchase account receivables owed by the Company directly
from its vendors. The Company, in turn, makes the regularly scheduled full vendor payments to the
bank participants.
INCOME TAXES The Company uses the asset and liability method of accounting for income
taxes. Deferred income taxes are determined based upon enacted tax laws and rates applied to the
differences between the financial statement and tax bases of assets and liabilities.
The Company recognizes taxes payable for the current year, as well as deferred tax assets and
liabilities for the future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns. The Company must assess the likelihood that any recorded deferred
tax assets will be recovered against future taxable income. To the extent the Company believes it is
more likely than not that the asset will not be recoverable, a valuation allowance must be established.
To the extent the Company establishes a valuation allowance or changes the allowance in a future
period, income tax expense will be impacted.
In evaluating income tax positions, the Company records liabilities for potential exposures. These
tax liabilities are adjusted in the period actual developments give rise to such change. Those
developments could be, but are not limited to, settlement of tax audits, expiration of the statute of
limitations, and changes in the tax code and regulations, along with varying application of tax policy
and administration within those jurisdictions. Refer to Note 8 for further discussion of income taxes
and changes in unrecognized tax benefit during fiscal 2010.
SALES TAXES The Company presents sales net of sales taxes in its consolidated statements of
operations.
REVENUE RECOGNITION The Company recognizes revenue from the sale of merchandise at the
time the merchandise is sold and the product is delivered to the customer. Service revenues are
recognized upon completion of the service. Service revenue consists of the labor charged for installing
merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.
The Company records revenue net of an allowance for estimated future returns. The Company
establishes reserves for sales returns and allowances based on current sales levels and historical return
rates. Revenue from gift card sales is recognized upon gift card redemption. The Company’s gift cards
do not have expiration dates. The Company recognizes breakage on gift cards when, among other
things, sufficient gift card history is available to estimate potential breakage and the Company
determines there are no legal obligations to remit the value of unredeemed gift cards to the relevant
jurisdictions. Estimated breakage revenue is immaterial for all periods presented.
In the first quarter of fiscal 2009, the Company launched a Customer Loyalty program. The
program allows members to earn points for each qualifying purchase. Points earned allow members to
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