Banana Republic 2015 Annual Report Download - page 39

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30
We sell merchandise to franchisees under multi-year franchise agreements. We recognize revenue from sales to
franchisees at the time merchandise ownership is transferred to the franchisee, which generally occurs when the
merchandise reaches the franchisee’s predesignated turnover point. We also receive royalties from franchisees
primarily based on a percentage of the total merchandise purchased by the franchisee, net of any refunds or
credits due them. Royalty revenue is recognized primarily when merchandise ownership is transferred to the
franchisee.
We record an allowance for estimated returns based on our historical return patterns and various other
assumptions that management believes to be reasonable. 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 sales return
allowance. However, if the actual rate of sales returns increases significantly, our operating results could be
adversely affected. We have not made any material changes in the accounting methodology used to estimate
future sales returns in the past three fiscal years.
Unredeemed Gift Cards, Gift Certificates, and Credit Vouchers
Upon issuance of a gift card, gift certificate, or credit voucher, a liability is established for its cash value. The
liability is relieved and net sales are recorded upon redemption by the customer. Over time, some portion of these
instruments is not redeemed (“breakage”). We determine breakage income for gift cards, gift certificates, and
credit vouchers based on historical redemption patterns. Breakage income is recorded in other income, which is a
component of operating expenses in the Consolidated Statements of Income, when we can determine the portion
of the liability where redemption is remote, which is three years after the gift card, gift certificate, or credit voucher
is issued. When breakage income is recorded, a liability is recognized for any legal obligation to remit the
unredeemed portion to relevant jurisdictions. Substantially all of our gift cards, gift certificates, and credit vouchers
have no expiration dates.
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 breakage income. However, if the actual pattern of redemption for gift cards,
gift certificates, and credit vouchers changes significantly, our operating results could be adversely affected. We
have not made any material changes in the accounting methodology used to estimate breakage income in the
past three fiscal years.
Income Taxes
We record a valuation allowance against our deferred tax assets when it is more likely than not that some portion
or all of such deferred tax assets will not be realized. In determining the need for a valuation allowance,
management is required to make assumptions and to apply judgment, including forecasting future income,
taxable income, and the mix of income or losses in the jurisdictions in which we operate. Our effective tax rate in a
given financial statement period may also be materially impacted by changes in the mix and level of income or
losses, changes in the expected outcome of audits, or changes in the deferred tax valuation allowance.
At any point in time, many tax years are subject to or in the process of being audited by various taxing authorities.
To the extent our estimates of settlements change or the final tax outcome of these matters is different from the
amounts recorded, such differences will impact the income tax provision in the period in which such
determinations are made. Our income tax expense includes changes in our estimated liability for exposures
associated with our various tax filing positions. Determining the income tax expense for these potential
assessments requires management to make assumptions that are subject to factors such as proposed
assessments by tax authorities, changes in facts and circumstances, issuance of new regulations, and resolution
of tax audits.
We believe the judgments and estimates discussed above are reasonable. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.