Radio Shack 2012 Annual Report Download - page 52

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international subsidiaries deemed to be permanently
invested are used to invest in the growth of these
operations.
Revenue Recognition: Our revenue is derived principally
from the sale of name brand and private brand products
and services to consumers. Revenue is recognized, net of
an estimate for customer refunds and product returns,
when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the
sales price is fixed or determinable, and collectability is
reasonably assured.
Certain products, such as wireless telephone handsets,
require the customer to use the services of a third-party
service provider. The third-party service provider pays us
an upfront commission and, in some cases, a monthly
recurring residual amount based upon the ongoing
arrangement between the service provider and the
customer. Our sale of an activated wireless handset is the
single event required to meet the delivery criterion for both
the upfront commission and the recurring residual revenue.
Upfront commission revenue, net of estimated service
deactivations, is generally recognized at the time an
activated wireless handset is sold to the customer at the
point-of-sale. Based on our extensive history in selling
activated wireless handsets, we have been able to
establish reliable deactivation estimates. Recurring residual
income is recognized as earned under the terms of our
contracts with the service providers, which is typically as
the service provider bills its customer, generally on a
monthly basis. Sales of wireless handsets and the related
commissions and residual income are approximately 45
percent of our total revenue. Our three largest third-party
wireless service providers are AT&T, Sprint, and Verizon.
Cost of Products Sold: Cost of products sold primarily
includes the total cost of merchandise inventory sold, direct
costs relating to merchandise acquisition and distribution
(including depreciation and excise taxes), costs of services
provided, in-bound freight expenses to our distribution
centers, out-bound freight expenses to our retail outlets,
physical inventory valuation adjustments and losses,
customer shipping and handling charges, and certain
vendor allowances (see “Vendor Allowances” below).
Vendor Allowances: We receive allowances from third-
party service providers and product vendors through a
variety of promotional programs and arrangements as a
result of purchasing and promoting their products and
services in the normal course of business. We consider
vendor allowances received to be a reduction in the price of
a vendor's products or services and record them as a
component of inventory until the product is sold, at which
point we record them as a component of cost of products
sold unless the allowances represent reimbursement of
specific, incremental and identifiable costs incurred to
promote a vendor's products and services. In this case, we
record the vendor reimbursement when earned as an offset
to the associated expense incurred to promote the
applicable products and/or services.
Advertising Costs: Our advertising costs are expensed
the first time the advertising takes place. We receive
allowances from certain third-party service providers and
product vendors that we record when earned as an offset to
advertising expense incurred to promote the applicable
products and/or services only if the allowances represent
reimbursement of specific, incremental and identifiable
costs (see “Vendor Allowances” above). Advertising
expense was $182.9 million, $208.9 million and $205.9
million for the years ended December 31, 2012, 2011 and
2010, respectively.
Stock-Based Compensation: We measure all employee
stock-based compensation awards using a fair value
method and record this expense in the consolidated
financial statements. Our stock-based compensation
relates to stock options, restricted stock awards, and other
equity-based awards issued to our employees and
directors. On the date that an award is granted, we
determine the fair value of the award and recognize the
compensation expense over the requisite service period,
which typically is the period over which the award vests.
Fair Value Measurements: Certain assets and liabilities are
required to be measured at fair value either on a recurring or
non-recurring basis. We estimate fair values based on one or
more of the following valuation techniques: the market
approach (comparable market prices), the income approach
(present value of future income or cash flow), or the cost
approach (cost to replace the service capacity of an asset or
replacement cost). See Note 13 - “Fair Value Measurements”
for additional disclosures of our fair value measurements.
Derivative Instruments and Hedging Activities: We
recognize all financial instruments that qualify for derivative
instrument accounting at fair value in the Consolidated
Balance Sheets. Changes in the fair value of derivative
financial instruments that qualify for hedge accounting are
recorded in stockholders’ equity as a component of
comprehensive income or as an adjustment to the carrying
value of the hedged item. Changes in fair values of
derivatives not qualifying for hedge accounting are reported
in earnings. Since the expiration of our interest rate swaps
in May 2011, we have not held any derivative instruments.
We maintain internal controls over our hedging activities,
which include policies and procedures for risk assessment
and the approval, reporting and monitoring of all derivative
financial instrument activities. We monitor our hedging
positions and creditworthiness of our counter-parties and
do not anticipate losses due to our counter-parties’
nonperformance. We do not hold or issue derivative