Pottery Barn 2008 Annual Report Download - page 61

Interest costs related to assets under construction, including software projects, are capitalized during the
construction or development period. We capitalized interest costs of $1,163,000, $1,389,000 and $699,000 in
fiscal 2008, fiscal 2007 and fiscal 2006, respectively.
For any facility closures where a lease obligation still exists, we record the estimated future liability associated
with the rental obligation on the date the store is closed, however, most store closures occur upon the lease
expiration.
We review the carrying value of all long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. We review for impairment all
stores for which current or projected cash flows from operations are either negative or nominal, or the
construction costs are significantly in excess of the amount originally expected. Impairment results when the
carrying value of the assets exceeds the undiscounted future cash flows over the remaining life of the lease. Our
estimate of undiscounted future cash flows over the lease term (typically 5 to 22 years) is based upon our
experience, historical operations of the stores and estimates of future store profitability and economic conditions.
The future estimates of store profitability and economic conditions require estimating such factors as sales
growth, gross margin, employment rates, lease escalations, inflation on operating expenses and the overall
economics of the retail industry for up to 20 years in the future, and are therefore subject to variability and
difficult to predict. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to
the difference between the net carrying value and the asset’s fair value. The fair value is estimated based upon
future cash flows (discounted at a rate that is commensurate with the risk and approximates our weighted average
cost of capital). We recorded impairment charges related to our underperforming retail stores of $33,995,000,
$1,082,000 and $5,629,000 in selling, general and administrative expenses in fiscal 2008, fiscal 2007 and fiscal
2006, respectively.
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 primarily
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 product and general liability claims reserves based on an actuarial analysis of
historical claims data. Self-insurance reserves for employee health benefits, workers’ compensation and product
and general liability claims were $21,006,000 and $21,512,000 as of February 1, 2009 and February 3, 2008,
respectively, and are recorded within accrued salaries, benefits and other on our Consolidated Balance Sheets.
Customer Deposits
Customer deposits are primarily comprised of unredeemed gift cards, gift certificates, and merchandise credits
and deferred revenue related to undelivered merchandise. We maintain a liability for unredeemed gift cards, gift
certificates, and merchandise credits until the earlier of redemption, escheatment or four years as we have
concluded that the likelihood of our gift cards and gift certificates being redeemed beyond four years from the
date of issuance is remote.
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,
49
Form 10-K