Pottery Barn 2007 Annual Report Download - page 55

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. We recorded impairment
charges of approximately $1,082,000, $5,629,000 and $733,000 in selling, general and administrative expenses
in fiscal 2007, fiscal 2006 and fiscal 2005, respectively, related to our retail stores.
Lease Rights and Other Intangible Assets
Lease rights, representing costs incurred to acquire the lease of a specific commercial property, are recorded at
cost in other assets and are amortized over the lives of the respective leases. Other intangible assets include fees
associated with the acquisition of our credit facility and are recorded at cost in other assets and amortized over
the life of the facility.
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 of $21,512,000 and $23,407,000 as of February 3, 2008 and January 28, 2007, respectively,
are recorded within accrued salaries, benefits and other on our consolidated balance sheet.
Customer Deposits
Customer deposits are primarily comprised of unredeemed gift certificates, gift cards and merchandise credits
and deferred revenue related to undelivered merchandise. We maintain a liability for unredeemed gift certificates,
gift cards 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
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. This change in estimate resulted in the recording
of income in selling, general and administrative expenses in the second quarter of fiscal 2006 of approximately
$12,400,000. As of February 3, 2008 and January 28, 2007, customer deposits were $201,743,000 and
$187,625,000, respectively.
Deferred Rent and Lease Incentives
For leases that contain fixed escalations of the minimum annual lease payment during the original term of the
lease, we recognize rental expense on a straight-line basis over the lease term, including the construction period,
and record the difference between rent expense and the amount currently payable as deferred rent. In accordance
with Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) 13-1, “Accounting for Rental Costs
Incurred During a Construction Period,” we record rental expense during the construction period. Deferred lease
incentives include construction allowances received from landlords, which are amortized on a straight-line basis
over the lease term, including the construction period.
Contingent Liabilities
Contingent liabilities are recorded when it is determined that the outcome of an event is expected to result in a
loss that is considered probable and reasonably estimable.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, investments, accounts payable and debt
approximate their estimated fair values.
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Form 10-K