Coach 2014 Annual Report Download - page 46

TABLE OF CONTENTS
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The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect our results of operations, financial condition and cash flows as well as the disclosure of
contingent assets and liabilities as of the date of the Company's financial statements. Actual results could differ from estimates in amounts that may be
material to the financial statements. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results
could differ 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.
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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. Estimates may differ from actual results due to the
quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. At June 28, 2014, a 10% change in the reserve
for slow-moving and aged inventory, excluding amounts associated with the Transformation Plan, would have resulted in an insignificant change in
inventory and cost of sales. In fiscal 2014, the Company made a strategic decision to donate and destroy certain inventory items resulting in a charge to cost
of sales of $82.2 million. Refer to Note 3, "Transformation, Restructuring and Other Related Actions," for charges related to inventory under the Company's
Transformation Plan.
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Revenue is recognized by the Company when there is persuasive evidence of an arrangement, delivery has occurred (and risks and rewards of ownership
have been transferred to the buyer), price has been fixed or is determinable, and collectability is reasonably assured.
Retail store and concession-based shop-in-shop revenues are recognized at the point of sale, which occurs when merchandise is sold in an over-the-
counter consumer transaction. These revenues are recognized net of estimated returns at the time of sale to consumers. Internet revenue from sales of products
ordered through the Company’s e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and
handling charges paid by customers. Internet revenue is also reduced by an estimate for returns.
Wholesale revenue is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of estimates of
returns, discounts, and markdown allowances. Returns and allowances require pre-approval from management and discounts are based on trade terms.
Estimates for markdown reserves are based on historical trends, actual and forecasted seasonal results, an evaluation of current economic and market
conditions, retailer performance, and, in certain cases, contractual terms. The Company reviews and refines these estimates on at least a quarterly basis. The
Company’s historical estimates of these costs have not differed materially from actual results.
At June 28, 2014, a 10% change in the allowances for estimated uncollectible accounts, markdowns and returns would have resulted in an insignificant
change in accounts receivable and net sales.
Gift cards issued by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company recognizes
income for unredeemed gift cards when the likelihood of a gift card being redeemed by a customer is remote, which is approximately two years after the gift
card is issued, and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction
as unclaimed or abandoned property. Revenue associated with gift card breakage is not material to the Company’s net operating results.
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Goodwill and certain other intangible assets deemed to have indefinite useful lives are not amortized, but are assessed for impairment at least annually.
The Company has no finite-lived intangible assets.
The Company uses a quantitative goodwill impairment test, which is a two-step process. The first step is to identify the existence of potential impairment
by comparing the fair value of each reporting unit with its net book value, including goodwill. If the fair value of a reporting unit exceeds its carrying value,
the reporting unit's goodwill is considered not to be impaired and performance of the second step of the quantitative goodwill impairment test is unnecessary.
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