DSW 2012 Annual Report Download - page 52

F- 12
expense. DSW will continue to classify income tax penalties as part of operating expenses in its consolidated statements of
operations.
Discontinued Operations- As a result of RVI’s disposition of Filene’s Basement during fiscal 2009, any changes to the gain on
disposal of Filene’s Basement operations are included in discontinued operations. As a result of RVI’s disposition of an 81%
ownership interest in its Value City business during fiscal 2007, changes to the loss on disposal of Value City are also included
in discontinued operations. Any changes in the carrying value of assets with residual interest in the discontinued business are
classified within continuing operations. See Note 3 for a discussion of discontinued operations.
Noncontrolling Interests- The noncontrolling interests represented the portion of legacy DSW’s total shareholders’ equity
owned by unaffiliated investors in DSW prior to the Merger and net income attributable to the unaffiliated investors. The
noncontrolling interest percentage was computed by the ratio of shares held by unaffiliated interests. After the Merger,
noncontrolling interests were eliminated.
Earnings Per Share- Basic earnings per share is based on net income and a simple weighted average of common shares
outstanding. Diluted earnings per share reflects the potential dilution of common shares, related to outstanding stock options
and restricted stock units. In previous periods, there was also potential dilution of common shares from stock appreciation
rights, warrants and PIES. See Note 5 for a detailed discussion of earnings per share.
Financial Instruments- The following assumptions were used to estimate the fair value of each class of financial instruments:
Cash and Equivalents- Cash and equivalents represent cash, money market funds and credit card receivables that
generally settle within three days. Amounts due from banks for credit card transactions totaled $13.0 million and
$12.6 million as of February 2, 2013 and January 28, 2012, respectively. The carrying amounts of cash and
equivalents approximate fair value. The Company also reviews cash balances on a bank by bank basis to identify
book overdrafts. Book overdrafts occur when the amount of outstanding checks exceed the cash deposited at a bank.
The Company reclassifies book overdrafts, if any, to accounts payable.
Investments- DSW determines the balance sheet classification of its investments at the time of purchase and evaluates
the classification at each balance sheet date. If DSW has the intent and ability to hold the investments to maturity,
investments are classified as held-to-maturity. Held-to-maturity securities are stated at amortized cost plus accrued
interest. Otherwise, investments are classified as available-for-sale. All income generated from these investments is
recorded as interest income.
The Company evaluates its investments for impairment and whether impairment is other-than-temporary at each
balance sheet date. In fiscal 2010, the Company recognized realized gains of $1.5 million for the sale of a fully
impaired auction rate security as non-operating income. Please see Note 11 for additional discussion of the
Company’s investments.
Accounts Receivable- Accounts receivable are classified as current assets because the average collection period is
generally shorter than one year. Accounts receivable are primarily construction and tenant allowance receivables
from landlords and receivables from DSW's affiliated business partners. The carrying amount approximates fair value
because of the relatively short average collection period of the instruments.
Derivative Financial Instruments- In accordance with ASC 815, Derivatives and Hedging, DSW, and prior to the
Merger, RVI, recognized all derivatives on the balance sheet at fair value. For derivatives that are not designated as
hedges under ASC 815, changes in the fair values were recognized in earnings in the period of change. There were no
derivatives designated as hedges outstanding as of February 2, 2013 or January 28, 2012. DSW does not hold or issue
derivative financial instruments for trading purposes. DSW, and prior to the Merger, RVI, estimated the fair values of
derivatives based on the Black-Scholes pricing model using current market information.
The embedded exchange feature of the Premium Income Exchangeable Securities ("PIES") was accounted for as a
derivative, which was recorded at fair value with changes in fair value in the statement of operations. Accordingly,
the accounting for the embedded derivative addressed the variations in the fair value of the obligation to settle the
PIES when the market value exceeded or was less than the threshold appreciation price. See Note 12 for a detailed
discussion of the Company’s derivative financial instruments.
Concentration of Credit Risk- Financial instruments, which principally subject the Company to concentration of credit risk,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS