American Eagle Outfitters 2014 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 AEO and aerie 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-AEO or aerie 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 AEREWARDS 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 total net revenue. 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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