Pottery Barn 2014 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 based on the present value of estimated future cash flows using a discount
rate 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 2014, fiscal 2013 and fiscal 2012, we recorded expense of approximately $241,000, $561,000 and
$6,071,000, respectively, associated with asset impairment charges primarily related to retail stores, 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 calculate the fair value based on the
present value of estimated future cash flows using a discount rate that approximates our weighted average cost of
capital. The process of evaluating the potential impairment of goodwill is subjective and requires significant
estimates and assumptions about the future, such as sales growth, gross margins, employment rates, capital
expenditures, 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 1, 2015 and
February 2, 2014, we had goodwill of $18,740,000 and $18,946,000, respectively, included in other assets,
primarily related to our fiscal 2011 acquisition of Rejuvenation Inc. We did not recognize any goodwill
impairment in fiscal 2014, fiscal 2013 or fiscal 2012.
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 these estimates 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
$24,901,000 and $21,755,000 as of February 1, 2015 and February 2, 2014, respectively.
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.
Deferred Rent and Lease Incentives
For leases that contain fixed escalations of the minimum annual lease payment during the original term of the
lease, we recognize rental expense on a straight-line basis over the lease term, including the construction period,
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Form 10-K