Pottery Barn 2006 Annual Report Download - page 60

Sales Returns 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
returns reserve will be adjusted accordingly. A summary of activity in the sales returns reserve is as follows:
Dollars in thousands Fiscal 20061Fiscal 20051Fiscal 20041
Balance at beginning of year $ 13,682 $ 13,506 $ 12,281
Provision for sales returns 264,630 243,807 215,715
Actual sales returns (262,845) (243,631) (214,490)
Balance at end of year $ 15,467 $ 13,682 $ 13,506
1Amounts are shown net of cost of goods sold.
Vendor Allowances
We receive allowances or credits from certain vendors for volume rebates. In accordance with Emerging Issues
Task Force Issue No. (“EITF”) 02-16, “Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor,” our accounting policy is to treat such volume rebates as an offset to the
cost of the product or services provided at the time the expense is recorded. These allowances and credits
received are primarily recorded in both cost of goods sold and in selling, general and administrative expenses.
Foreign Currency Translation
The functional currency of our Canadian subsidiary is the Canadian dollar. Assets and liabilities are translated
into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses
are translated at the average exchange rates during the period. The resulting translation adjustments are recorded
as other comprehensive income within shareholders’ equity. Gains and losses resulting from foreign currency
transactions have not been significant and are included in selling, general and administrative expenses.
Financial Instruments
As of January 28, 2007, we have 14 retail stores in Canada, which expose us to market risk associated with
foreign currency exchange rate fluctuations. As necessary, we may enter into 30-day foreign currency contracts
to minimize any currency remeasurement risk associated with intercompany assets and liabilities of our Canadian
subsidiary. These contracts are accounted for by adjusting the carrying amount of the contract to market and
recognizing any gain or loss in selling, general and administrative expenses in each reporting period. We did not
enter into any foreign currency contracts during fiscal 2006 or fiscal 2005. Any gain or loss associated with these
types of contracts in prior years was not material to us.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes
arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements. We record reserves for estimates of probable settlements of foreign and
domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The
results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues.
Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and
level of earnings.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted
average number of common shares outstanding for the period plus common stock equivalents consisting of
shares subject to stock-based awards with exercise prices less than or equal to the average market price of our
common stock for the period, to the extent their inclusion would be dilutive.
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