Build-A-Bear Workshop 2012 Annual Report Download - page 59

BUILD-A-BEAR WORKSHOP, INC. 2012 FORM 10-K
Notes to Consolidated Financial Statements (continued)
under a commercial property lease for a property located in
France. These rights can be subsequently sold by us to a new
tenant. All key money deposits were sold in 2010.
(i) Other Assets
Other assets consist primarily of deferred leasing fees
and deferred costs related to franchise agreements. Deferred
leasing fees are initial, direct costs related to the Company’s
operating leases and are amortized over the term of the
related leases. Deferred franchise costs are initial costs related
to the Company’s franchise agreements that are deferred and
amortized over the life of the respective franchise agreement.
Amortization expense related to other assets was
$0.3 million, $0.5 million and $0.7 million for 2012, 2011
and 2010, respectively.
(j) Long-lived Assets
Whenever facts and circumstances indicate that the
carrying value of a long-lived asset may not be recoverable,
the carrying value is reviewed. If this review indicates that
the carrying value of the asset will not be recovered, as
determined based on projected undiscounted cash flows
related to the asset over its remaining life, the carrying value
of the asset is reduced to its estimated fair value. See
Note 4 — Property and Equipment and Note 6 — Other
Intangible Assets for further discussion regarding the
impairment of long-lived assets.
The calculation of fair value requires multiple assumptions
regarding our future operations to determine future cash
flows, including but not limited to, sales volume, margin rates
and discount rates. If different assumptions were used in the
analysis, it is possible that the amount of the impairment
charge may have been significantly different than what
was recorded.
(k) Deferred Rent
Certain of the Company’s operating leases contain
predetermined fixed escalations of minimum rentals during
the original lease terms. For these leases, the Company
recognizes the related rental expense on a straight-line basis
over the life of the lease and records the difference between
the amounts charged to operations and amounts paid as
deferred rent. The Company also receives certain lease
incentives in conjunction with entering into operating leases.
These lease incentives are recorded as deferred rent at
the beginning of the lease term and recognized as a reduction
of rent expense over the lease term. In addition, certain of the
Company’s leases contain future contingent increases in
rentals. Such increases in rental expense are recorded in the
period that it is probable that store sales will meet or exceed
the specified target that triggers contingent rental expense.
(l) Franchises
The Company defers initial, one-time nonrefundable
franchise fees and amortizes them over the life of the
respective franchise agreements, which extend for periods up
to 25 years. The Company’s obligations under the contract
are ongoing and include operations and product development
support and training, generally concentrated around new
store openings. Continuing franchise fees are recognized as
revenue as the fees are earned.
(m) Retail Revenue Recognition
Net retail sales are net of discounts, exclude sales tax,
and are recognized at the time of sale. Shipping and
handling costs billed to customers are included in net
retail sales.
Revenues from the sale of gift cards are recognized at the
time of redemption. Unredeemed gift cards are included in
gift cards and customer deposits on the consolidated balance
sheets. The company escheats a portion of unredeemed gift
cards according to the escheatment regulations of the relevant
authority that generally require remittance of the cost of
merchandise portion of unredeemed gift cards over five years
old. The difference between the value of gift cards and the
amount escheated is recorded as income in the consolidated
statement of operations.
The Company has a customer loyalty program, the Stuff
Fur Stuff club, whereby guests enroll in the program and
receive one point for every dollar and receive awards for
various discounts on future purchases after acheiving defined
point thresholds. An estimate of the obligation related to the
program, based on historical redemption patterns, is recorded
as deferred revenue and a reduction of net retail sales. The
deferred revenue obligation is reduced, and a corresponding
amount is recognized in net retail sales, in the amount of and
at the time of redemption of the awards.
For 2012, 2011 and 2010, historical rates for points
converting into awards and ultimate award redemption were
applied to actual points and awards outstanding at the
respective balance sheet date to calculate the liability and
corresponding adjustment to net retail sales. Management
reviews these patterns and assesses the adequacy of the
deferred revenue liability at the end of each fiscal quarter.
Due to the estimates involved in these assessments,
adjustments to the historical rates are generally made no more
often than annually in order to allow time for more definite
trends to emerge.
Based on the assessment at the end of 2012, 2011 and
2010, the deferred revenue liability was adjusted downward
by $0.5 million,$1.5 million and $4.3 million, respectively,
with corresponding increases to net retail sales, and net
income was increased by $0.5 million, $0.9 million and
$2.6 million, respectively.
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