Pottery Barn 2008 Annual Report Download - page 63

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
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.
Financial Instruments
As of February 1, 2009, we have 16 retail stores in Canada and limited operations in both Europe and Asia, each of
which expose us to market risk associated with foreign currency exchange rate fluctuations. Although these
exchange rate fluctuations have not been material to us in the past, we may enter into foreign currency contracts in
the future to minimize any currency remeasurement risk associated with the intercompany assets and liabilities of
our subsidiaries. We did not enter into any foreign currency contracts during fiscal 2008, fiscal 2007 or fiscal 2006.
Foreign Currency Translation
We have subsidiaries which have foreign operations and a functional currency different than the U.S. dollar, such
as in Canada (functional currency of the CAD), in Europe (functional currency of the Euro), in the United
Kingdom (functional currency of GBP), and in Singapore (functional currency of the Singapore Dollar). Assets
and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date,
while revenues and expenses are translated at the average exchange rates during the period. The resulting
translation adjustments are recorded as other comprehensive income within shareholders’ equity. Gains and
losses in fiscal 2008 and fiscal 2007 resulting from foreign currency transactions have not been significant and
are included in selling, general and administrative expenses.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted
average number of common shares outstanding for the period plus common stock equivalents consisting of
shares subject to stock-based awards with exercise prices less than or equal to the average market price of our
common stock for the period, to the extent their inclusion would be dilutive.
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.
51
Form 10-K