Pottery Barn 2013 Annual Report Download - page 59

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 recognizing compensation expense in
our consolidated financial statements for all stock-based awards using a fair value based-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 each stock-based award is amortized over the requisite service period.
Foreign Currency Translation
As of February 2, 2014, our retail stores in Canada, Australia and the United Kingdom, and our operations
throughout 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
those in Canada (Canadian dollar), Europe (euro or British pound) and Australia (Australian 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 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. Common stock
equivalents consist 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 our estimates of the additional income tax liability
that is more likely than not to result from the ultimate resolution 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. We review and update the
estimates used in the accrual for uncertain tax positions as more definitive information becomes available from
taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of
other events.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year and adjust these
estimates throughout the year as necessary. Adjustments to our income tax provision due to changes in our
estimated effective tax rate are recorded in the interim period in which the change occurs. 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 various taxing jurisdictions.
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Form 10-K