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Table of Contents
HSN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Estimates
HSNi prepares its financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). These
principles require management to make certain estimates and assumptions during the preparation of its consolidated financial statements. These
estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ
from those estimates.
Significant estimates underlying the accompanying consolidated financial statements include: the determination of the lower of cost or
market adjustment for inventory; sales returns and other revenue allowances; the allowance for doubtful accounts; the recoverability of long-
lived assets; the impairment of goodwill and intangible assets; the determination of deferred income taxes, including related valuation
allowances; the accrual for actual, pending or threatened litigation, claims and assessments; and assumptions related to the determination of
stock-based compensation.
Certain Risks and Concentrations
HSNi’s business is subject to certain risks and concentrations including dependence on third-party technology providers, exposure to risks
associated with online commerce security, consumer credit risk and credit card fraud. HSNi also depends on third-party service providers for
processing certain fulfillment services.
NOTE 3—GOODWILL AND INTANGIBLE ASSETS
HSNi assesses the impairment of goodwill and indefinite-lived identifiable intangible assets at least annually during the fourth quarter and
whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In performing this review, HSNi assesses
the implied fair value of its goodwill and intangible assets. If it is determined that the implied fair value of goodwill and/or indefinite-lived
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.
In the second quarter of 2008, HSNi recorded impairment charges related to goodwill and indefinite-lived intangible assets of
$221.5 million and $78.5 million, respectively. The impairment charges were recorded at the
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