Pier 1 2016 Annual Report Download - page 48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the assets, generally 30 years for buildings and three to ten years for equipment, furniture and fixtures. Depreciation of
improvements to leased properties is based upon the shorter of the remaining primary lease term or the estimated useful lives of
such assets. Depreciation related to the Company’s distribution and fulfillment centers, including related equipment, is included in
cost of sales. All other depreciation costs are included in depreciation and were $50,944,000, $46,304,000 and $38,873,000
in fiscal 2016, 2015 and 2014, respectively.
Expenditures for maintenance, repairs and renewals that do not materially prolong the original useful lives of the assets are
charged to expense as incurred. In the case of disposals, assets and the related depreciation are removed from the accounts
and the net amount, less proceeds from disposal, is credited or charged to income.
Long-lived assets are reviewed for impairment at least annually or whenever an event or change in circumstances indicates that
their carrying values may not be recoverable. If the impairment analysis indicates that the carrying value of the assets exceeds the
sum of the expected undiscounted cash flows, the assets may be considered impaired. Impairment, if any, is recorded in the
period in which the impairment occurred. The Company recorded no material impairment charges in fiscal 2016, 2015 or 2014.
Insurance provision — The Company maintains insurance for workers’ compensation and general liability claims with
deductibles of $1,000,000 per occurrence. The liability recorded for such claims is determined by estimating the total future
claims cost for events that occurred prior to the balance sheet date. The estimates consider historical claims loss development
factors as well as information obtained from and projections made by the Company’s broker, actuary, insurance carriers and third
party claims administrators. The recorded liabilities for workers’ compensation and general liability claims include claims occurring
in prior years but not yet settled and reserves for fees. The recorded liability for workers’ compensation claims and fees was
$25,399,000 and $22,845,000 at February 27, 2016 and February 28, 2015, respectively. The recorded liability for general
liability claims and fees was $4,585,000 and $4,455,000 at February 27, 2016 and February 28, 2015, respectively.
Revenue recognition — Revenue is recognized upon customer receipt or delivery for retail sales. A reserve has been
established for estimated merchandise returns based upon historical experience and other known factors. The reserves for
estimated merchandise returns at the end of fiscal 2016 and 2015 were $4,227,000 and $2,859,000, respectively. The
Company’s revenues are reported net of discounts and returns, net of sales tax, and include wholesale sales and royalties
received from Sears Operadora de Mexico S.A. de C.V. and Corporacion de Tiendas Internationales, S.A. de C.V. Amounts
billed to customers for shipping and handling are included in net sales.
Cost of sales — Cost of sales includes the cost of the merchandise, buying expenses, costs related to the Company’s
distribution network (including depreciation) and store occupancy expenses. The costs incurred by the Company for shipping
and handling are recorded in cost of sales.
Gift cards — Revenue associated with gift cards is recognized when merchandise is sold and a gift card is redeemed as
payment. Gift card breakage is estimated and recorded as income based upon an analysis of the Company’s historical data and
expected trends in redemption patterns and represents the remaining unused portion of the gift card liability for which the
likelihood of redemption is remote. If actual redemption patterns vary from the Company’s estimates or if regulations change,
actual gift card breakage may differ from the amounts recorded. For all periods presented, estimated gift card breakage was
recognized 30 months after the original issuance and was $4,925,000, $3,938,000 and $4,455,000 in fiscal 2016, 2015 and
2014, respectively.
Leases — The Company leases certain property consisting principally of retail stores, warehouses, its home office and material
handling and office equipment under operating leases expiring through fiscal 2029. Most retail store locations were leased for
primary terms of ten years with varying renewal options and rent escalation clauses. Escalations occurring during the primary
terms of the leases are included in the calculation of the future minimum lease payments, and the rent expense related to these
leases is recognized on a straight-line basis over the lease term, including free rent periods prior to the opening of its stores. The
portion of rent expense applicable to a store before opening is included in SG&A expenses. Once opened for business, rent
expense is included in cost of sales. Certain leases provide for additional rental payments based on a percentage of sales in
excess of a specified base. This additional rent is accrued when it appears probable that the sales will exceed the specified
base. Construction allowances received from landlords are initially recorded as lease liabilities and amortized as a reduction of
rental expense over the primary lease term.
Advertising costs — Advertising production costs are expensed the first time the advertising occurs and all other advertising
costs are expensed as incurred. Advertising costs primarily include event and seasonal mailers, radio, newspaper and television
and were $66,289,000, $81,483,000 and $76,071,000 in fiscal 2016, 2015 and 2014, respectively. Prepaid advertising at the
end of fiscal years 2016 and 2015 was $3,639,000 and $4,269,000, respectively.
Defined benefit plans — The Company maintains supplemental retirement plans for certain of its current and former executive
officers. These plans provide that upon death, disability, reaching retirement age or certain termination events, a participant will
receive benefits based on highest compensation, years of service and years of plan participation. These benefit costs are
42 PIER 1 IMPORTS, INC. 2016 Form 10-K