Radio Shack 2012 Annual Report Download - page 35

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cause fluctuations in the amount of recorded cost of
products sold. If our estimates regarding market value are
inaccurate or changes in consumer demand affect certain
products in an unforeseen manner, we may be exposed to
material losses or gains in excess of our established
valuation reserve. We believe that we have sufficient
current and historical knowledge to record reasonable
estimates for our inventory valuation reserves. However, it
is possible that actual results could differ from recorded
reserves.
Estimation of Reserves and Valuation Allowances for
Self-Insurance, Income Taxes, and Litigation
Contingencies
Description
The amount of liability or valuation allowance we record
related to insurance claims, tax positions, and legal
contingencies requires us to make judgments about the
amount of expense that will ultimately be incurred or the
realization of certain assets.
We are insured for certain losses related to workers'
compensation, property and other liability claims, with
deductibles up to $1.0 million per occurrence. This
insurance coverage limits our exposure for any catastrophic
claims that result in liability in excess of the deductible. We
also have a self-insured health program administered by a
third-party covering the majority of our employees that
participate in our health insurance programs. We estimate
the amount of our reserves for all insurance programs
discussed above at the end of each reporting period. This
estimate is based on historical claims experience,
demographic factors, severity factors, and other factors we
deem relevant.
We are subject to periodic audits from multiple domestic
and foreign tax authorities related to income tax, sales and
use tax, personal property tax, and other forms of taxation.
These audits examine our tax positions, timing of income
and deductions, and allocation procedures across multiple
jurisdictions. Our accounting for tax estimates and
contingencies requires us to evaluate tax issues and
establish reserves in our consolidated financial statements
based on our estimate of the probability of realizing these
tax exposures. Depending on the nature of the tax issue,
we could be subject to audit over several years; therefore,
our estimated reserve balances might exist for multiple
years before an issue is resolved by the taxing authority.
We record a valuation allowance to reduce a deferred tax
asset if based on the consideration of all available
evidence, it is more likely than not that all or some portion
of the deferred tax asset will not be realized. Significant
weight is given to evidence that can be objectively verified.
We evaluate our deferred income taxes quarterly to
determine if valuation allowances are required by
considering available evidence, including historical and
projected taxable income and tax planning strategies. Any
deferred tax asset subject to a valuation allowance is still
available to us to offset future taxable income, and we will
adjust a previously established valuation allowance if we
change our assessment of the amount of deferred income
tax asset that is more likely than not to be realized.
We are involved in legal proceedings and governmental
inquiries associated with employment and other matters.
Our accounting for legal contingencies requires us to
estimate the probable losses in these matters. These
estimates have been developed in consultation with in-
house and outside legal counsel and are based upon a
combination of litigation and settlement strategies.
Judgments and uncertainties involved in the estimate
Our liabilities for insurance, tax and legal contingencies
contain uncertainties because we are required to make
assumptions and to apply judgment to estimate the
exposures associated with these items. We use our history
and experience, as well as the specific circumstances
surrounding these claims, in evaluating the amount of
liability we should record. As additional information
becomes available, we assess the potential liability related
to our various claims and revise our estimates as
appropriate. These revisions could materially affect our
results of operations and financial position or liquidity.
Effect if actual results differ from assumptions
We have not made any material changes in the
methodology used to estimate our insurance, tax, or legal
contingencies reserves during the past three fiscal years,
and we do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or
assumptions for these items. However, a 10% change in
our insurance reserves at December 31, 2012, would have
affected net income by approximately $3.9 million. As of
December 31, 2012, actual losses had not exceeded our
estimates. Additionally, for claims that exceed our
deductible amount, we record a gross liability and
corresponding receivable representing expected
recoveries, since we are not legally relieved of our
obligation to the claimant.
Although we believe that our insurance, tax and legal
reserves are based on reasonable judgments and
estimates, actual results could differ, which may expose us
to material gains or losses in future periods. These actual
results could materially affect our effective tax rate,
earnings, deferred tax balances and cash flows in the
period of resolution.