Home Shopping Network 2015 Annual Report Download - page 46

44
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 which began in January
2014 with one major financial institution that fixes the variable benchmark component (LIBOR) of HSNi's interest rate on a
portion of its variable-rate debt. 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 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 entirely to retained earnings.
Private Label Credit Card
HSN's credit card program offers eligible customers a private label credit card. All cardholders receive certain rewards
and benefits which are designed to recognize and promote client loyalty. HSN designs, executes and administers marketing
programs to promote usage of the card to current and potential customers. These marketing programs are funded largely by the
sponsoring bank. HSN also saves on interchange fees that it would incur if its customers used third-party cards. Purchases
made through the private label credit card represented 34%, 31% and 28% of HSN's sales in 2015, 2014 and 2013, respectively.
In November 2013, HSN extended its agreement with the sponsoring bank through 2020. As with the original
agreement, HSN received an upfront signing bonus from the sponsoring bank which is being amortized over the term of the
agreement and also receives ongoing payments for new accounts activated as well as a share of net sales collected by the
sponsoring bank. For the years ended December 31, 2015, December 31, 2014 and December 31, 2013, HSN recognized
approximately $16.9 million, $16.5 million, and $12.8 million, respectively, of income from the sponsoring bank that was used
to offset credit card fees included in costs of goods sold.
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 annual expected effective tax rate; the
determination of deferred income taxes, including related valuation allowances; the accrual for actual, pending or threatened
litigation, claims and assessments; the breakage of customer credits; 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.