Pottery Barn 2006 Annual Report Download - page 61

Stock-Based Compensation
On January 30, 2006, we adopted SFAS No. 123R, “Share-Based Payments,” which required us to measure and
record compensation expense in our consolidated financial statements for all employee stock-based compensation
awards using a fair value method. For stock options and stock-settled stock appreciation rights (“option awards”),
fair value is determined using the Black-Scholes valuation model, while restricted stock units are valued using the
closing price of our stock on the date prior to the date of issuance. Significant factors affecting the fair value of
option awards include the estimated future volatility of our stock price and the estimated expected term until the
option award is exercised. The fair value of the award is amortized over the expected service period. Total stock-
based compensation expense (including the implementation of this Statement), net of tax, was $16,575,000, or
$0.14 per diluted share, in fiscal 2006 and is recorded as a component of selling, general and administrative
expenses. Prior to fiscal 2006, we accounted for stock-based compensation arrangements using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” and related interpretations. Accordingly, no compensation expense was recognized prior to fiscal 2006
for option awards with an exercise price equal to the fair value on the date of grant.
New Accounting Pronouncements
On January 30, 2006, we adopted FSP FAS 13-1, “Accounting for Rental Costs Incurred During a Construction
Period,” which requires us to expense all rental costs associated with our operating leases that are incurred during a
construction period. The adoption of this Staff Position resulted in after-tax occupancy expense of approximately
$1,439,000, or $0.01 per diluted share, in fiscal 2006 and is recorded as a component of cost of goods sold.
In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes
– An Interpretation of FASB Statement No. 109,” which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a
tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, interest and penalties,
accounting in interim periods, transition and disclosure requirements for uncertain tax positions. We will adopt the
provisions of FIN 48 beginning in the first quarter of fiscal 2007. We are currently in the process of determining the
effect the adoption of FIN 48 will have on our consolidated financial statements.
In June 2006, the FASB’s EITF reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation).” The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are
assessed by a governmental authority on specific revenue-producing transactions between a seller and customer.
EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of
assessed taxes that are included in revenues if they are accounted for under the gross method. EITF 06-3 is
effective for interim and annual periods beginning after December 15, 2006. We present revenues net of any
taxes collected from customers and remitted to governmental authorities. We do not expect the adoption of EITF
06-3 to have an impact on our consolidated financial position, results of operations or cash flows.
As of January 28, 2007, we adopted the evaluation requirements of SAB No. 108, “Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” which
provides the Staff’s views regarding the process of quantifying financial statement misstatements, such as
assessing both the carryover and reversing effects of prior year misstatements on the current year financial
statements. The adoption of SAB No. 108 did not have a material impact on our consolidated financial position,
results of operations or cash flows in fiscal 2006.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures,” which establishes a single
authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional
disclosures about fair value measurements. SFAS No. 157 only applies to fair value measurements that are
already required or permitted by other accounting standards, except for measurements of share-based payments,
and measurements that are similar to, but not intended to be, fair value. This Statement is effective for fiscal
years beginning after November 15, 2007 and will require additional disclosures in our financial statements. We
do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial position,
results of operations or cash flows.
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Form 10-K