Home Shopping Network 2012 Annual Report Download - page 46

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Of these amounts, $10.2 million and $14.7 million as of December 31, 2012 and 2011, respectively, related to catalogs that had not yet
been mailed. Advertising expense was $245.0 million , $215.5 million , and $183.4 million for the years ended December 31, 2012, 2011 and
2010, 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 of 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.
Derivative Instruments
HSNi uses derivatives in the management of interest rate risk with respect to interest expense on variable rate debt. Such instruments are
not held or used for trading purposes. HSNi is party to an interest rate swap agreement with one major financial institution that will fix the
variable benchmark component (LIBOR) of HSNi's interest rate on a portion of its term loan beginning January 2014. See Note 8 for further
discussion of derivative instruments.
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
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.
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