Pottery Barn 2010 Annual Report Download - page 53

Revenue Recognition
We recognize revenues and the related cost of goods sold (including shipping costs) at the time the products are
delivered to our customers. 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. As of January 30, 2011 and January 31, 2010, our reserve for sales returns was $12,502,000 and
$11,839,000, respectively.
Stock-Based Compensation
We measure and record compensation expense in our consolidated financial statements for all stock-based
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 $26,630,000, $24,989,000 and $12,131,000 (which includes
an $11,023,000 reversal of compensation expense related to performance-based stock awards, see Note H to our
Consolidated Financial Statements), in fiscal 2010, fiscal 2009 and fiscal 2008, respectively, and is recorded as a
component of selling, general and administrative expenses.
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 our earnings.
In accordance with the accounting for income taxes and uncertain tax positions, we make estimates regarding the
likelihood that certain tax positions will be realized upon ultimate settlement and we record reserves where
necessary. 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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Form 10-K