Pottery Barn 2013 Annual Report Download - page 57

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 and the overall economics of the retail industry, and are therefore subject to variability and difficult to
predict. Actual future results may differ from those estimates. If a long-lived asset is found to be impaired, the
amount recognized for impairment is equal to the difference between the asset’s net carrying value and its fair
value. Long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the
fair value hierarchy. The fair value is estimated based upon the present value of estimated future cash flows
(discounted at a rate commensurate with the risk and that approximates our weighted average cost of capital).
For any store or facility closure where a lease obligation still exists, we record the estimated future liability
associated with the rental obligation on the cease use date.
During fiscal 2013 and fiscal 2012 we recorded expense of approximately $561,000 and $6,071,000 associated
with asset impairment charges primarily related to retail stores, all of which is recorded within selling, general
and administrative expenses.
During fiscal 2011, we recorded expense of approximately $3,194,000 associated with asset impairment and
early lease termination charges for underperforming retail stores, substantially all of which is recorded within
selling, general and administrative expenses.
Goodwill
Goodwill is not amortized, but rather is subject to impairment testing annually (on the first day of the fourth
quarter), or between annual tests whenever events or changes in circumstances indicate that the fair value of a
reporting unit may be below its carrying amount. The first step of the impairment test requires determining the
fair value of the reporting unit. We use the income approach, whereby we estimate the fair value based on the
present value of estimated future cash flows. The process of evaluating the potential impairment of goodwill is
subjective and requires significant estimates and assumptions such as sales growth, gross margins, employment
rates, inflation and future economic and market conditions. Actual future results may differ from those estimates.
If the carrying value of the reporting unit’s assets and liabilities, including goodwill, is in excess of its fair value,
goodwill may be impaired, and we must perform a second step of comparing the implied fair value of the
goodwill to its carrying value to determine the impairment charge, if any. At February 2, 2014 and February 3,
2013, we had goodwill of $18,946,000 and $18,951,000, respectively, included in other assets, primarily related
to our fiscal 2011 acquisition of Rejuvenation Inc. We did not recognize any goodwill impairment in fiscal 2013,
fiscal 2012 or fiscal 2011.
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 $21,755,000 and $20,275,000 as of February 2, 2014 and February 3, 2013,
respectively, and are recorded within accrued salaries, benefits and other.
Customer Deposits
Customer deposits are primarily comprised of unredeemed gift cards and merchandise credits and deferred
revenue related to undelivered merchandise. We maintain a liability for unredeemed gift cards and merchandise
credits until the earlier of redemption, escheatment or four years as we have concluded that the likelihood of our
gift cards being redeemed beyond four years from the date of issuance is remote.
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Form 10-K