American Eagle Outfitters 2011 Annual Report Download - page 22

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Table of Contents
percentages and can be affected by changes in merchandise mix and changes in actual shrinkage trends. We do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or assumptions we use to calculate our inventory shrinkage reserve. However, if actual physical
inventory losses differ significantly from our estimate, our operating results could be adversely affected.
Asset Impairment. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 360, Property,
Plant, and Equipment, we evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can
be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired
and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. When events such as these occur,
the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating income under loss on
impairment of assets.
Our impairment loss calculations require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values,
including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. We do not believe there is a
reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if
actual results are not consistent with our estimates and assumptions, our operating results could be adversely affected.
Investment Securities. In accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), we measure our investment securities
using Level 1, Level 2 and Level 3 inputs. Level 1 and Level 2 inputs are valued using quoted market prices while we use a discounted cash flow ("DCF")
model to determine the fair value of our Level 3 investments. The assumptions in our DCF model include different recovery periods depending on the type of
security and varying discount factors for yield and illiquidity. These assumptions are subjective and they are based on our current judgment and our view of
current market conditions. The use of different assumptions would result in a different valuation and related charge. Future adverse changes in market
conditions, continued poor operating results of underlying investments or other factors could result in further losses that may not be reflected in an
investment's current carrying value, possibly requiring an additional net impairment loss recognized in earnings in the future.
We evaluate our investments for impairment in accordance with ASC 320, Investments – Debt and Equity Securities ("ASC 320"). ASC 320 provides
guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss.
An investment is considered impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to evaluate the
realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss is recognized in the Consolidated Statement
of Operations equal to the difference between the investment's cost and its fair value. Additionally, ASC 320 requires additional disclosures relating to debt
and equity securities both in the interim and annual periods as well as requires us to present total other-than-temporary impairment ("OTTI") with an
offsetting reduction for any non-credit loss impairment amount recognized in other comprehensive income ("OCI").
Share-Based Payments. We account for share-based payments in accordance with the provisions of ASC 718, Compensation — Stock Compensation
("ASC 718"). To determine the fair value of our stock option awards, we use the Black-Scholes option pricing model, which requires management to apply
judgment and make assumptions to determine the fair value of our awards. These assumptions include estimating the length of time employees will retain
their vested stock options before exercising them (the "expected term") and the estimated volatility of the price of our common stock over the expected term.
We calculate a weighted-average expected term based on historical experience. Expected stock price volatility is based on a combination of historical
volatility of our common stock and implied volatility. We chose
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