American Eagle Outfitters 2011 Annual Report Download - page 48

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Table of Contents
AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Points earned under the credit card rewards program on purchases at AE, aerie and 77kids are accounted for by analogy to ASC 605-25, Revenue
Recognition, Multiple Element Arrangements ("ASC 605-25"). The Company believes that points earned under its point and loyalty programs represent
deliverables in a multiple element arrangement rather than a rebate or refund of cash. Accordingly, the portion of the sales revenue attributed to the award
points is deferred and recognized when the award is redeemed or when the points expire. Additionally, credit card reward points earned on non-AE, aerie or
77kids purchases are accounted for in accordance with ASC 605-25. As the points are earned, a current liability is recorded for the estimated cost of the
award, and the impact of adjustments is recorded in cost of sales.
The Company offers its customers the AEREWARD$sm loyalty program (the "Program"). Under the Program, customers accumulate points based on
purchase activity and earn rewards by reaching certain point thresholds during three-month earning periods. Rewards earned during these periods are valid
through the stated expiration date, which is approximately one month from the mailing date of the reward. These rewards can be redeemed for a discount on a
purchase of merchandise. Rewards not redeemed during the one-month redemption period are forfeited. The Company determined that rewards earned using
the Program should be accounted for in accordance with ASC 605-25. Accordingly, the portion of the sales revenue attributed to the award credits is deferred
and recognized when the awards are redeemed or expire.
Income Taxes
The Company calculates income taxes in accordance with ASC 740, Income Taxes ("ASC 740"), which requires the use of the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying
amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured
using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are
expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred
taxes may not be realized. Changes in the Company's level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the
results of tax audits, may materially impact the Company's effective income tax rate.
The Company evaluates its income tax positions in accordance with ASC 740 which prescribes a comprehensive model for recognizing, measuring,
presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to
file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is "more likely than not" that the position
is sustainable based on its technical merits.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a
valuation allowance require management to make estimates and assumptions. The Company believes that its assumptions and estimates are reasonable,
although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net
income.
Revenue Recognition
Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company's e-commerce operation records revenue upon the
estimated customer receipt date of the merchandise. Shipping and handling revenues are included in net sales. Sales tax collected from customers is excluded
from revenue and is included as part of accrued income and other taxes on the Company's Consolidated Balance Sheets.
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