Home Shopping Network 2011 Annual Report Download - page 45

HSN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Of these amounts, $14.7 million and $13.0 million as of December 31, 2011 and 2010, respectively, related
to catalogs that had not yet been mailed. Advertising expense was $237.2 million, $209.2 million and $196.7
million for the years ended December 31, 2011, 2010 and 2009, respectively.
Income Taxes
HSNi accounts for income taxes under the liability method, and deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that it is more
likely than not that the deferred tax asset will not be realized. HSNi records interest and penalties on potential tax
contingencies as a component of income tax expense and records interest net of any applicable related income
tax benefit.
HSNi recognizes liabilities for uncertain tax positions based on a two-step process. 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 its technical merits. 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.
Stock-Based Compensation
HSNi recognizes compensation expense for stock-based awards, reduced for estimated forfeitures, on a
straight-line basis over the requisite service period of the award, which is generally the vesting term of the
outstanding stock awards. Tax benefits resulting from tax deductions in excess of the stock-based compensation
expense recognized in the consolidated statements of cash flows are reported as a component of financing cash
flows. HSNi issues new shares to satisfy equity vestings and exercises. See Note 11 for a further description for
our stock compensation plans.
Earnings Per Share
HSNi computes basic earnings per share by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is computed using the treasury stock
method.
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
intangible assets; the determination of deferred income taxes, including related valuation allowances; the accrual
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