Barnes and Noble 2010 Annual Report Download - page 26

Market is determined based on the estimated net realiz-
able value, which is generally the selling price. Reserves
for non-returnable inventory are based on the Company’s
history of liquidating non-returnable inventory. The
Company does not believe there is a reasonable likelihood
that there will be a material change in the future estimates
or assumptions used to calculate the non-returnable
inventory reserve. However, if assumptions based on the
Company’s history of liquidating non-returnable inventory
are incorrect, it may be exposed to losses or gains that could
be material. A 10% change in actual non-returnable inven-
tory would have affected net earnings by approximately $1.7
million in fiscal 2010.
The Company also estimates and accrues shortage for the
period between the last physical count of inventory and
the balance sheet date. Shortage rates are estimated and
accrued based on historical rates and can be affected by
changes in merchandise mix and changes in actual shortage
trends. The Company does not believe there is a reasonable
likelihood that there will be a material change in the future
estimates or assumptions used to calculate shortage rates.
However, if the Company’s estimates regarding shortage
rates are incorrect, it may be exposed to losses or gains that
could be material. A 10% change in actual shortage rates
would have affected net earnings by approximately $1.4
million in fiscal 2010.
Stock-Based Compensation
The calculation of stock-based employee compensation
expense involves estimates that require management’s
judgment. These estimates include the fair value of each of
the stock option awards granted, which is estimated on the
date of grant using a Black-Scholes option pricing model.
There are two significant inputs into the Black-Scholes
option pricing model: expected volatility and expected
term. The Company estimates expected volatility based
on traded option volatility of the Company’s stock over a
term equal to the expected term of the option granted. The
expected term of stock option awards granted is derived
from historical exercise experience under the Company’s
stock option plans and represents the period of time that
stock option awards granted are expected to be outstand-
ing. The assumptions used in calculating the fair value of
stock-based payment awards represent management’s best
estimates, but these estimates involve inherent uncertain-
ties and the application of management’s judgment. As a
result, if factors change and the Company uses different
assumptions, stock-based compensation expense could be
materially different in the future. In addition, the Company
is required to estimate the expected forfeiture rate, and
only recognize expense for those shares expected to vest. If
the Company’s actual forfeiture rate is materially different
from its estimate, the stock-based compensation expense
could be significantly different from what the Company
has recorded in the current period. See Note 3 to the
Consolidated Financial Statements for a further discussion
on stock-based compensation.
The Company does not believe there is a reasonable
likelihood there will be a material change in the future
estimates or assumptions used to determine stock-based
compensation expense. However, if actual results are not
consistent with the Company’s estimates or assumptions,
the Company may be exposed to changes in stock-based
compensation expense that could be material. If actual
results are not consistent with the assumptions used,
the stock-based compensation expense reported in the
Company’s financial statements may not be representative
of the actual economic cost of the stock-based compensa-
tion. A 10% change in the Company’s stock-based com-
pensation expense for the year ended May 1, 2010 would
not have had a material impact on the Company’s results of
operations in fiscal 2010.
Other Long-Lived Assets
The Company’s other long-lived assets include property
and equipment and amortizable intangibles. At May 1,
2010, the Company had $812.0 million of property and
equipment, net of accumulated depreciation, and $266.1
million of amortizable intangible assets, net of amortiza-
tion, accounting for approximately 29.1% of the Company’s
total assets. The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable in accordance with Accounting Standards
Codification (ASC) 360-10, Accounting for the Impairment or
Disposal of Long-Lived Assets (ASC 360-10). The Company
evaluates long-lived assets for impairment at the individual
Barnes & Noble store level, except for B&N College long-
lived assets, which are evaluated for impairment at the
university contract combined store level, which is the low-
est level at which individual cash flows can be identified.
When evaluating long-lived assets for potential impair-
ment, the Company will first compare the carrying amount
of the assets to the individual store’s estimated future
undiscounted cash flows. If the estimated future cash flows
are less than the carrying amount of the assets, an impair-
ment loss calculation is prepared. The impairment loss
calculation compares the carrying amount of the assets to
the individual store’s fair value based on its estimated dis-
counted future cash flows. If required, an impairment loss
24 Barnes & Noble, Inc. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued