Home Shopping Network 2008 Annual Report Download - page 36

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less than the carrying amount, an impairment charge, equal to the excess, is recorded. The implied fair value of
goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The
estimated fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit (including
the unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the
estimated fair value of the reporting unit was the purchase price paid. The fair value of the reporting unit is
determined by using a combination of a discounted cash flow analysis and an equity analysis based on the trading
value of its common stock. The discounted cash flow analysis indicates the fair value of the reporting units based on
the present value of the cash flows expected to be generated in the future. The equity analysis is based on the
trading value of its common stock as of the valuation date or the average stock price over a range of dates prior to
the valuation date, plus an estimated control premium.
In assessing fair value, HSNi considers, among other indicators, differences between estimated and actual
cash flows, changes in the related discount rate and the relationship between the trading price of its common stock
and its per-share book value. Determining fair value requires the exercise of significant judgments, including
judgments about discount rates, perpetual growth rates, royalty rates, terminal growth rates, control premiums and
the amount and timing of future cash flows. These factors used in the determination of fair value, particularly
estimated cash flows, are sensitive to, among other things, changes in the retail consumer market and the general
economy. For more information on the impairment charges recognized during 2008, see Note 3 of Notes to
Consolidated Financial Statements.
Returns Reserves
Net sales from HSNi primarily consists of merchandise sales and is reduced by incentive discounts and
sales returns. In accordance with Staff Accounting Bulletin 104, revenue is recorded when delivery to the customer
has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and
rewards of ownership, which is generally on the date of shipment. HSNi's sales policy allows customers to return
merchandise for a full refund or exchange, subject in some cases to restocking fees and exceptions for certain
merchandise. Allowances for returned merchandise and other adjustments (including reimbursed shipping and
handling costs) are provided based upon past experience. Actual levels of product returns may vary from these
estimates. HSNi's estimated return rates were 18.4%, 18.4% and 17.7% in 2008, 2007 and 2006, respectively.
Allowance for Doubtful Accounts
HSNi makes judgments as to its ability to collect outstanding receivables and provide allowances when it is
assessed that all or a portion of the receivable will not be collected. HSNi determines its allowance by considering a
number of factors, including the length of time accounts receivable are past due, its previous loss history and the
condition of the general economy. HSNi writes off accounts receivable when they become uncollectible.
Income Taxes
Estimates of deferred income taxes and the significant items giving rise to the deferred assets and liabilities
are shown in Note 13 of Notes to Consolidated Financial Statements, and reflect management's assessment of actual
future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both
timing and the probability of realization. Actual income taxes could vary from these estimates due to future changes
in income tax law, state income tax apportionment, as well as actual operating results of HSNi that vary significantly
from anticipated results. Valuation allowances are related to items for which it is more likely than not that the tax
benefit will not be realized. In assessing the adequacy of a recorded valuation allowance, we consider all positive
and negative information and a variety of factors including the scheduled reversal of deferred tax liabilities,
historical and projected future taxable income and feasible tax planning strategies. Effective January 1, 2007, HSNi
adopted the provisions of FIN 48. As a result of the adoption of FIN 48, HSNi recognizes liabilities for uncertain tax
positions based on the two-step process prescribed by the interpretation. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon
ultimate settlement. This measurement step is inherently difficult and requires subjective estimations of such
amounts to determine the probability of various possible outcomes. HSNi considers many factors when evaluating