Express 2011 Annual Report Download - page 54

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Description of Policy Judgments and Uncertainties
Effect if Actual Results Differ from
Assumptions
Gift Card Breakage
We sell gift cards in our retail stores
and through our e-commerce website
and third parties, which do not expire
or lose value over periods of
inactivity. We account for gift cards
by recognizing a liability at the time
a gift card is sold. We recognize
income from gift cards when they are
redeemed by the customer. In
addition, income on unredeemed gift
cards is recognized proportionally
using a time based attribution method
from issuance of the gift card to the
time it is can be determined that the
likelihood of the gift card being
redeemed is remote. The gift card
breakage rate is based on historical
redemption patterns.
Our accounting methodology for
calculating gift card breakage
contains uncertainties because it
requires management to make
assumptions that future gift card
redemptions will follow the
pattern of previous redemptions.
Our estimates for these items are
based primarily on historical
transaction experience.
We have not made any material
changes in the accounting
methodology used to determine gift
card breakage over the past 3 years.
We have no reason to believe that
there will be a material change in
the future estimates or
assumptions we use to measure
gift card breakage. However, if
actual results are not consistent
with our estimates or assumptions,
we may be exposed to losses or
gains that could be material.
A 100 basis point change in our
gift card breakage rate as of
January 28, 2012 would have
affected pre-tax income by
approximately $0.6 million.
Inventories
Inventories are principally valued at
the lower of cost or market on a
weighted-average cost basis. We
record a lower of cost or market
reserve for our inventories if the cost
of specific inventory items on hand
exceeds the amount we expect to
realize from the ultimate sale or
disposal of the inventory.
We also record an inventory
shrinkage reserve calculated as a
percentage of cost of sales for
estimated merchandise losses for the
period between the last physical
inventory count and the balance sheet
date. These estimates are based on
historical results and can be affected
by changes in merchandise mix and/
or changes in shrinkage trends.
Our accounting methodology for
determining the lower of cost or
market reserve contains
uncertainties because it requires
management to make assumptions
and estimates that are based on
factors such as merchandise
seasonality, historical trends, and
estimated inventory levels,
including sell-through of
remaining units.
Our accounting methodology for
estimating the inventory shrinkage
reserve contains uncertainty as it
requires management to make the
assumption that future shrink
results will follow the pattern of
previous physical inventory
losses.
We have not made any material
changes in the accounting
methodology used to determine
the lower of cost or market or
shrinkage reserve over the past 3
years. We have no reason to
believe that there will be a
material change in the future
estimates or assumptions we use
to measure the lower of cost or
market or shrinkage reserve.
However, if actual results are not
consistent with our estimates or
assumptions, we may be exposed
to losses or gains that could be
material.
A 10% increase or decrease in the
lower of cost or market adjustment
would impact the inventory
balance and pre-tax income by
$0.9 million as of and for the year
ended January 28, 2012.
A 10% increase or decrease in the
inventory shrink reserve balance
would impact the reserve balance
and pre-tax income by $1.8
million as of and for the year
ended January 28, 2012.
46