Stein Mart 2010 Annual Report Download - page 32

STEIN MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables in thousands, except per share amounts)
F-8
x Royalty fees received from the Bank are based on a percentage of cardholder purchases. Royalty fees are deferred as a reward
liability (in accrued liabilities) and are subsequently recognized as revenue when the reward is redeemed or upon expiration. The
related cost of the reward is recognized when the reward is redeemed.
x Reward breakage revenue is recorded in other income in the period the reward expires.
x Marketing expenditures incurred, representing payments to third parties, are expensed as incurred and recorded in selling,
general and administrative (“SG&A”) expenses. Reimbursements of marketing expenses received from the Bank are recorded in
other income in the same period as the related expenses are recorded.
Operating Leases. We lease all of our retail stores under operating leases. Certain lease agreements contain rent holidays, and/or rent
escalation clauses. Except for contingent rent, we recognize rent expense on a straight-line basis over the lease term and record the
difference between the amount charged to expense and the rent paid as a deferred rent liability. Contingent rent, determined based on a
percentage of sales in excess of specified levels, is recognized as rent expense when achievement of the specified sales that triggers the
contingent rent is probable.
The landlord/lessor constructs the building leasehold improvements for the majority of our stores. However, in certain “replacement-tenant”
situations, we may perform the remodeling. To determine the proper recording of improvements, we first ascertain whether the remodeling
falls within the scope of ASC Topic 840-40, Leases, Leaseback Transactions. If it does not, we assess whether such improvements are to
be accounted for as lessor or lessee assets. If the landlord/lessor makes the improvements and presents us with the finished space on a
"turnkey" basis, we view the assets as being lessor assets. In situations where we do the remodeling work and receive an allowance that
may or may not cover all the costs, we make a judgment as to the classification between lessor and lessee assets. We consider an asset
to be a lessor asset if all of the following criteria are met:
x the lease specifically requires the lessee to make the improvement,
x the improvement is fairly generic,
x the improvement increases the fair value of the property to the lessor, and
x the useful life of the improvement is longer than our lease term.
If any of the above criteria are not met, we consider the assets to be lessee assets, which are recorded as leasehold improvements in the
balance sheet. Payments received from the lessor to fund any portion of the cost of lessee assets are accounted for as lease incentives.
Assets considered to be lessor assets are not reflected on our balance sheet. To the extent that we paid for such lessor assets and were
not reimbursed through construction allowances, such net payments are recorded as prepaid rent, which is amortized to rent expense over
the lease term.
Advertising Expense. Advertising costs are expensed as incurred. Advertising expenses of $53.8 million, $50.2 million and $51.5 million
are reflected in SG&A expenses in the Consolidated Statements of Operations for 2010, 2009 and 2008, respectively.
Income Taxes. We follow the guidance in ASC Topic 740, Income Taxes, which requires recognition of deferred tax assets and liabilities
for the expected future income tax consequences of events that have been included in the consolidated financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying
amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance for amounts that do not satisfy required realization criteria. See Note 6
for further discussion.
Share-Based Compensation. We follow the guidance in ASC Topic 718, Stock Compensation, to record share-based compensation.
Pursuant to the guidance, we recognize expense in the financial statements for the fair values of all share-based payments to employees
over the employees’ requisite service periods.
Earnings Per Share (“EPS”). We follow the guidance of ASC Topic 260, Earnings Per Share, which clarifies that unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities
and are to be included in the computation of earnings per share ("EPS") under the two-class method. Our restricted stock awards are
considered “participating securities” because they contain non-forfeitable rights to dividends. Under the two-class method, EPS is
computed by dividing earnings allocated to common stockholders by the weighted-average number of common shares outstanding for the
period. In applying the two-class method, earnings are allocated to both common stock shares and participating securities based on their
respective weighted-average shares outstanding for the period.