Coach 2012 Annual Report Download - page 43

inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from
estimates in amounts that may be material to the financial statements. The development and selection of the
Company’s critical accounting policies and estimates are periodically reviewed with the Audit Committee of
the Board.
The accounting policies discussed below are considered critical because changes to certain judgments and
assumptions inherent in these policies could affect the financial statements. For more information on Coach’s
accounting policies, please refer to the Notes to Consolidated Financial Statements.
Income Taxes
The Company’s effective tax rate is based on pre-tax income, statutory tax rates, tax laws and
regulations, and tax planning strategies available in the various jurisdictions in which Coach operates.
Deferred tax assets are reported at net realizable value, as determined by management. Significant
management judgment is required in determining the effective tax rate, in evaluating our tax positions and in
determining the net realizable value of deferred tax assets. In accordance with ASC 740-10, the Company
recognizes the impact of tax positions in the financial statements if those positions will more likely than not
be sustained on audit, based on the technical merits of the position. Tax authorities periodically audit the
Company’s income tax returns. Management believes that our tax filing positions are reasonable and legally
supportable. However, in specific cases, various tax authorities may take a contrary position. A change in our
tax positions or audit settlements could have a significant impact on our results of operations. For further
information about income taxes, see the Income Taxes note presented in the Notes to the Consolidated
Financial Statements.
Inventories
The Company’s inventories are reported at the lower of cost or market. Inventory costs include material,
conversion costs, freight and duties and are determined by the first-in, first-out method. The Company reserves
for slow-moving and aged inventory based on historical experience, current product demand and expected
future demand. A decrease in product demand due to changing customer tastes, buying patterns or increased
competition could impact Coach’s evaluation of its slow-moving and aged inventory and additional reserves
might be required. At June 30, 2012, a 10% change in the reserve for slow-moving and aged inventory would
have resulted in an insignificant change in inventory and cost of goods sold.
Goodwill and Other Intangible Assets
The Company evaluates goodwill and other indefinite life intangible assets annually for impairment. In
order to complete our impairment analysis, we must perform a valuation analysis which includes determining
the fair value of the Company’s reporting units based on discounted cash flows. This analysis contains
uncertainties as it requires management to make assumptions and estimate the profitability of future growth
strategies. The Company determined that there was no impairment in fiscal 2012, fiscal 2011 or fiscal 2010.
Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for impairment whenever events or
circumstances indicate that the carrying value of the assets may not be recoverable. The evaluation is based on
a review of forecasted operating cash flows and the profitability of the related asset group. An impairment loss
is recognized if the forecasted cash flows are less than the carrying amount of the asset. The Company
recorded an impairment loss in fiscal 2009 of $1.5 million related to the closure of three underperforming
stores. The Company did not record any impairment losses in fiscal 2012, fiscal 2011 or fiscal 2010. However,
as the determination of future cash flows is based on expected future performance, impairment could result in
the future if expectations are not met.
Revenue Recognition
Sales are recognized at the point of sale, which occurs when merchandise is sold in an over-the-counter
consumer transaction or, for the wholesale channels, upon shipment of merchandise, when title passes to the
customer. Revenue associated with gift cards is recognized upon redemption. The Company estimates the
amount of gift cards that will not be redeemed or remitted as escheatable property, based on historical
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