American Eagle Outfitters 2014 Annual Report Download - page 22

Table of Contents
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.
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 choose to use a combination of historical and implied volatility as we
believe that this combination is more representative of future stock price trends than historical volatility alone. Changes in these assumptions
can materially affect the estimate of the fair value of our share-based payments and the related amount recognized in our Consolidated
Financial Statements.
Income Taxes. We calculate 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 our 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
effective income tax rate.
We evaluate our 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. We believe that our 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.
Key Performance Indicators
Our management evaluates the following items, which are considered key performance indicators, in assessing our performance:
Comparable sales — Comparable sales provide a measure of sales growth for stores and channels open at least one year over the
comparable prior year period. In fiscal years following those with 53 weeks, including Fiscal 2013, the prior year period is shifted by one
week to compare similar calendar weeks. A store is included in comparable sales in the thirteenth month of operation. However, stores
that have a gross
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