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Table of Contents
occurred, determining the future cash flows from the assets and applying the appropriate discount rate when measuring the fair value. The
determination of cash flows is based upon assumptions that may not occur.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
HSNi assesses the impairment of goodwill and identifiable indefinite-lived intangible assets at least annually during the fourth quarter and
whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. In performing this review, HSNi is
required to make an assessment of the implied fair value of its goodwill and intangible assets. If it is determined that the implied fair value of
goodwill and/or intangible assets is 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 consist of merchandise sales and are reduced by incentive discounts and sales returns. HSNi’s sales policy
allows customers to return virtually all merchandise for a full refund or exchange, subject to pre-established time restrictions. 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 17.8%, 17.8% and 18.4% in 2010, 2009 and 2008,
respectively.
Allowance for Doubtful Accounts
HSNi makes judgments as to its ability to collect outstanding receivables and provide allowances when it has determined 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 tax 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
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