Pier 1 2007 Annual Report Download - page 34

The assumptions made in determining the above estimates are reviewed continually and the liability
adjusted accordingly as new facts are revealed. Changes in circumstances and conditions affecting the
assumptions used in determining the liabilities could cause actual results to differ from the Company’s
recorded amounts.
Defined benefit plans — The Company maintains supplemental retirement plans (the “Plans”) for certain
of its executive officers. The Plans provide that upon death, disability, reaching retirement age or certain
termination events, a participant will receive benefits based on highest compensation and years of service.
These benefit costs are dependent upon numerous factors, assumptions and estimates. Benefit costs may be
significantly affected by changes in key actuarial assumptions such as the discount rate, compensation rates, or
retirement dates used to determine the projected benefit obligation. Additionally, changes made to the
provisions of the Plans may impact current and future benefit costs.
Income taxes — The Company records income tax expense using the liability method for taxes. The
Company is subject to income tax in many jurisdictions, including the United States, various states and
localities, and foreign countries. At any point in time, multiple tax years are subject to audit by various
jurisdictions and the Company records reserves for estimates of probable tax exposures for foreign and
domestic tax audits. The timing of these audits and negotiations with taxing authorities may affect the ultimate
settlement of these issues. The process of determining tax expense by jurisdiction involves the calculation of
actual current tax expense or benefit, together with the assessment of deferred tax expense resulting from
differing treatment of items for tax and financial accounting purposes. Deferred tax assets and liabilities are
recorded in the Company’s consolidated balance sheets and are classified as current or noncurrent based on
the classification of the related assets or liabilities for financial reporting purposes. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not those assets
will be realized. If different assumptions had been used, the Company’s tax expense or benefit, assets and
liabilities could have varied from recorded amounts. If actual results differ from estimated results or if the
Company adjusts these assumptions in the future, the Company may need to adjust its deferred tax assets or
liabilities, which could impact its effective tax rate. In evaluating the likelihood that sufficient earnings would
be available in the near future to realize the deferred tax assets, the Company considered cumulative losses
over three years including the current year.
During fiscal 2007, the Company concluded that a valuation allowance was necessary based upon this
evaluation. In addition, net deferred tax assets arising from current year losses in excess of the amount
expected to be carried back to offset taxable income in a prior year were fully reserved through a valuation
allowance. As these deferred tax assets were established and fully reserved during fiscal 2007, there was no
net impact to the provision of income taxes. At the end of fiscal 2007, the net deferred tax assets and the
offsetting valuation allowance totaled $86.3 million.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation has not had a significant impact on the operations of the Company during the preceding three
years.
IMPACT OF NEW ACCOUNTING STANDARDS
In July 2006, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”),
which clarifies the accounting for uncertainty in tax positions. FIN 48 prescribes the minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements. It also provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods,
disclosure and transition. The provisions of FIN 48 are effective for the Company as of the beginning of fiscal
2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening
retained earnings. The Company is currently analyzing the cumulative effect adjustment to retained earnings
that will be recorded upon adoption.
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