Home Shopping Network 2013 Annual Report Download - page 32

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analysis with consideration of an equity analysis based on the trading value of its common stock. HSNi utilizes the relief from
royalty method to assess fair values of its trademarks and trade names.
In assessing fair value, HSNi considers, among other indicators, differences between estimated and actual cash flows and
revenue streams and changes in the related discount, royalty and terminal growth rates. Determining these rates requires the
exercise of significant judgments. These factors used in the determination of fair value are sensitive to, among other things,
changes in the retail consumer market and the general economy.
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 17.0%, 17.8% and 18.5% in 2013, 2012 and 2011, 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 are determined to be 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 12 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.
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. 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 and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not
accurately anticipate actual outcomes.
Inventory Valuation
Inventories are valued at the lower of cost or market, cost being determined based upon the first-in, first-out method.
Market is determined on the basis of net realizable value, giving consideration to obsolescence and other factors. Net realizable
value is estimated by HSNi based upon historical sales data, the age of inventory, the quantity of goods on hand and the ability
to return merchandise to vendors. The actual net realizable value may vary from estimates due to changes in customer tastes or
viewing habits, or judgmental decisions made by merchandising personnel when ordering new products.