Pottery Barn 2006 Annual Report Download - page 48

We review the carrying value of all long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. In accordance with SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review for impairment all
stores for which current cash flows from operations are either negative or nominal, or the construction costs are
significantly in excess of the amount originally expected. Impairment results when the carrying value of the
assets exceeds the undiscounted future cash flows over the life of the lease. Our estimate of undiscounted future
cash flows over the lease term (typically 5 to 22 years) is based upon our experience, historical operations of the
stores and estimates of future store profitability and economic conditions. The future estimates of store
profitability and economic conditions require estimating such factors as sales growth, employment rates, lease
escalations, inflation on operating expenses and the overall economics of the retail industry for up to 20 years in
the future, and are therefore subject to variability and difficult to predict. If a long-lived asset is found to be
impaired, the amount recognized for impairment is equal to the difference between the net carrying value and the
asset’s fair value. The fair value is estimated based upon future cash flows (discounted at a rate that approximates
our weighted average cost of capital) or other reasonable estimates of fair market value. See Note A to the
Consolidated Financial Statements for additional information regarding Property and Equipment.
Self-Insured Liabilities
We are primarily self-insured for workers’ compensation, employee health benefits and product and general
liability claims. We record self-insurance liabilities based on claims filed, including the development of those
claims, and an estimate of claims incurred but not yet reported. Factors affecting this estimate include future
inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a
different amount of claims occur compared to what was estimated, or costs of the claims increase or decrease
beyond what was anticipated, reserves may need to be adjusted accordingly. We determine our workers’
compensation liability and general liability claims reserves based on an actuarial analysis. Reserves for self-
insurance liabilities are recorded within accrued salaries, benefits and other on our consolidated balance sheet.
Customer Deposits
Customer deposits are primarily comprised of unredeemed gift certificates and merchandise credits and deferred
revenue related to undelivered merchandise. We maintain a liability for unredeemed gift certificates and
merchandise credits until the earlier of redemption, escheatment or four years. During the second quarter of fiscal
2006, we completed an analysis of our historical gift certificate and gift card redemption patterns, which included
an independent actuarial study based on our historical redemption data. As a result of this analysis, we concluded
that the likelihood of our gift certificates and gift cards being redeemed beyond four years from the date of
issuance is remote. As a result, we changed our estimate of the elapsed time for recording income associated with
unredeemed gift certificates and gift cards to four years from our prior estimate of seven years.
Revenue Recognition
We recognize revenues and the related cost of goods sold (including shipping costs) at the time the products are
received by our customers in accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 101,
“Revenue Recognition in Financial Statements” as amended by SAB No. 104, “Revenue Recognition.” Revenue
is recognized for retail sales (excluding home-delivered merchandise) at the point of sale in the store and for
home-delivered merchandise and direct-to-customer sales when the merchandise is delivered to the customers.
Discounts provided to customers are accounted for as a reduction of sales. We record a reserve for estimated
product returns in each reporting period. Shipping and handling fees charged to the customer are recognized as
revenue at the time the products are delivered to the customer. Revenues are presented net of any taxes collected
from customers and remitted to governmental authorities.
Sales Return Reserve
Our customers may return purchased items for an exchange or refund. We record a reserve for estimated product
returns, net of cost of goods sold, based on historical return trends together with current product sales
performance. If actual returns, net of cost of goods sold, are different than those projected by management, the
estimated sales return reserve will be adjusted accordingly.
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