Pottery Barn 2008 Annual Report Download - page 52

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. As of February 1, 2009 and February 3, 2008, our reserve for sales returns was $10,142,000 and
$17,259,000, respectively.
Stock-Based Compensation
We measure and record 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 estimated future volatility of our stock price and the
estimated expected term until the option award is exercised or cancelled. The fair value of the award is amortized
over the requisite service period. Total stock-based compensation expense was $12,131,000, $26,812,000 and
$26,759,000, in fiscal 2008, fiscal 2007 and fiscal 2006, respectively, and is recorded as a component of selling,
general and administrative expenses.
Fiscal 2008 stock-compensation expense was impacted by the reversal of approximately $11,023,000 of expense
previously recognized relating to previously issued stock awards that would have vested based on the
achievement of certain performance criteria. We had recognized compensation expense related to these awards as
we believed that it was probable that the performance criteria would be achieved. During the third quarter of
fiscal 2008, due to the decline in our operating performance, we concluded that it was no longer probable that
these criteria would be achieved and therefore reversed approximately $11,023,000 of compensation expense
previously recognized.
Subsequently, our Board of Directors decided to remove or modify the performance conditions but retain the
service provisions of the awards. As a result, these awards are now considered probable of vesting. Accordingly,
we measured the fair value of all such awards as of the date of the modification and will recognize the fair value
over the remaining service period of the awards.
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.
Additionally, our effective tax rate in a given financial statement period may be materially impacted by changes
in the mix and level of earnings.
We adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes
– An Interpretation of FASB Statement No. 109 on January 29, 2007, which clarifies the accounting for uncertain
tax positions. FIN 48 prescribes a process for the recognition and measurement of a tax position taken or
expected to be taken in a tax return and requires us to make estimates of the likelihood that certain tax positions
will be realized upon ultimate settlement. It is reasonably possible that current income tax examinations
involving uncertain tax positions could be resolved within the next 12 months through administrative
adjudicative procedures or settlement.
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