Pottery Barn 2007 Annual Report Download - page 56

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 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 20071
(53 Weeks)
Fiscal 20061
(52 Weeks)
Fiscal 20051
(52 Weeks)
Balance at beginning of year $ 15,467 $ 13,682 $ 13,506
Provision for sales returns 277,281 264,630 243,807
Actual sales returns (275,489) (262,845) (243,631)
Balance at end of year $ 17,259 $ 15,467 $ 13,682
1Amounts are shown net of cost of goods sold.
Vendor Allowances
We receive allowances or credits from certain vendors for volume rebates. We 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 recorded in both cost of goods sold and in selling, general and administrative expenses.
Cost of Goods Sold
Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost
of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as
shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy
costs, including common area maintenance and utilities. Shipping costs consist of third party delivery services
and shipping materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail
stores, distribution warehouses, customer care centers, supply chain operations (buying, receiving and
inspection), and corporate administrative functions. These costs include employment, advertising, third party
credit card processing and other general expenses.
Stock-Based Compensation
We account for stock-based compensation arrangements in accordance with Statements of Financial Accounting
Standards (“SFAS”) No. 123R, “Share-Based Payment,” by measuring and recording compensation expense in
our consolidated financial statements for all 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
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