Pep Boys 2012 Annual Report Download - page 83

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended February 2, 2013, January 28, 2012 and January 29, 2011
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, ‘‘Income Taxes,’’ for further discussion of
income taxes and changes in unrecognized tax benefit.
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 gift card breakage revenue is immaterial for all periods presented.
The Company’s Customer Loyalty program allows members to earn points for each qualifying
purchase. Points earned allow members to receive a certificate that may be redeemed on future
purchases within 90 days of issuance. The retail value of points earned by loyalty program members is
included in accrued liabilities as deferred income and recorded as a reduction of revenue at the time
the points are earned, based on the historic and projected rate of redemption. The Company
recognizes deferred revenue and the cost of the free products distributed to loyalty program members
when the awards are redeemed. The cost of the free products distributed to program members is
recorded within costs of revenues.
A portion of the Company’s transactions includes the sale of auto parts that contain a core
component. These components represent the recyclable portion of the auto part. Customers are not
charged for the core component of the new part if a used core is returned at the point of sale of the
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