Home Shopping Network 2013 Annual Report Download - page 44

42
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.
Share Repurchases
Shares repurchased pursuant to HSNi's share repurchase program are immediately retired upon purchase. Repurchased
common stock is reflected as a reduction of shareholders' equity. HSNi's accounting policy related to its share repurchases is to
reduce its common stock based on the par value of the shares and to reduce its capital surplus for the excess of the repurchase
price over the par value. Since the inception of its share repurchase program in September 2011, HSNi has had an accumulated
deficit balance; therefore, the excess over the par value has been applied to additional paid-in capital. Once HSNi has retained
earnings, the excess will be charged entirelyto retained earnings.
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 and contingent consideration related to acquisitions.
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—INTANGIBLE ASSETS AND GOODWILL
HSNi assesses the impairment of goodwill and indefinite-lived identifiable intangible assets, principally trademarks and
trade names, at least annually during the fourth quarter and whenever events or circumstances indicate that the carrying value
may not be fully recoverable. In performing this review, HSNi has the option of performing a qualitative assessment to
determine whether it is more likely than not that the fair values of the reporting unit and/or indefinite-lived intangible assets are
less than the carrying values. If HSNi determines that it is not more likely that the fair value is less than its carrying value, then
the goodwill and/or the indefinite-lived intangible assets are deemed to be not impaired and no further testing is required until
the next annual test date (or sooner if conditions or events before that date raise concerns of potential impairment in the
business). If HSNi determines that it is more likely than not that the fair value is less than its carrying value, then the
quantitative goodwill and/or indefinite-lived intangible asset impairment tests (as discussed below) must be completed.
If necessary, HSNi performs a quantitative assessment of the fair values 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 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 any 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