Pottery Barn 2011 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 by measuring and recording 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 grant. 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, converted or
cancelled. The fair value of the award is amortized over the requisite service period.
Foreign Currency Translation
As of January 29, 2012, our 16 retail stores in Canada and our limited operations in Asia and Europe, expose us
to market risk associated with foreign currency exchange rate fluctuations.
Additionally, some of our foreign operations have a functional currency different than the U.S. dollar, such as in
Canada (functional currency of the Canadian Dollar) and in Europe (functional currency of the Euro or Great
British Pound). 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 stockholders’
equity. Gains and losses 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 our earnings.
New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This guidance
revises the manner in which entities present comprehensive income in their financial statements. The new
guidance removes the presentation options in previous guidance and requires entities to report components of
comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but
consecutive statements. The new guidance does not change the items that must be reported in other
comprehensive income. This amended guidance is effective for our first quarter of fiscal 2012 and will only
impact the presentation of comprehensive income within our consolidated financial statements.
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Form 10-K