Pottery Barn 2014 Annual Report Download - page 59

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. Restricted
stock units are valued using the closing price of our stock on the date prior to the date of grant. The fair value of
each stock-based award is amortized over the requisite service period.
Foreign Currency Translation
As of February 1, 2015, 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. While the gains
and losses resulting from foreign currency exchange rate fluctuations have not been material to us, we have
continued to see volatility in the exchange rates in the countries in which we do business. These gains and losses
are included in selling, general and administrative expenses (except for those discussed in Note M).
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 our
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 examinations. At
any one time, many tax years are subject to examination by various taxing jurisdictions. The results of these
examinations 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 examination, upon expiration of statutes of
limitation, or upon occurrence of other events.
In order to compute the tax 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. The tax
(or benefit) related to items other than ordinary income is individually computed and recognized when the items
occur. 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.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue and
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Form 10-K