Lululemon 2010 Annual Report Download - page 52

Table of Contents
Long-Lived Assets. Long-lived assets, including intangible assets with finite useful lives, held for use are
evaluated for impairment when the occurrence of events or changes in circumstances indicates that the carrying value
of the assets may not be recoverable as measured by comparing their net book value to the estimated future cash
flows generated by their use and eventual disposition. Impaired assets are recorded at fair value, determined
principally by the estimated future cash flows expected from their use and eventual disposition. Reductions in asset
values resulting from impairment valuations are recognized in income in the period that the impairment is
determined. Long-lived assets, including intangible assets with finite useful lives, held for sale are reported at the
lower of the carrying value of the asset and fair value less cost to sell. Any write-downs to reflect fair value less
selling cost is recognized in income when the asset is classified as held for sale. Gains or losses on assets held for
sale and asset dispositions are included in provision for impairment and lease exit costs.
Income Taxes. We follow the liability method with respect to accounting for income taxes. Deferred income
tax assets and liabilities are determined based on temporary differences between the carrying amounts and the tax
basis of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates that are
expected to be in effect when these differences are anticipated to reverse. Deferred income tax assets are reduced by
a valuation allowance, if based on the weight of available positive and negative evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
The recognition of a deferred income tax asset is based upon several assumptions and management forecasts,
including current and proposed tax legislation, current and anticipated taxable income, utilization of previously
unrealized non-operating loss carry forwards and regulatory reviews of tax filings. Given the judgments and
estimates required and the sensitivity of the results to the significant assumptions used, we believe the accounting
estimates used in relation to the recognition of deferred income tax assets are subject to measurement uncertainty and
are susceptible to a material change if the underlying assumptions change.
For financial reporting purposes, we generally provide taxes at the rate applicable for the appropriate tax
jurisdiction. Because our present intention is to reinvest the unremitted earnings in our foreign operations, we do not
provide U.S. income taxes on unremitted earnings of foreign subsidiaries. Management periodically assesses the
need to utilize these unremitted earnings to finance our foreign operations. This assessment is based on cash flow
projections that are the result of estimates of future production, fiscal requirements by tax jurisdiction of our
operations and operational and fiscal objectives by tax jurisdiction for our operations. Such estimates are inherently
imprecise since many assumptions utilized in the cash flow projections are subject to revision in the future.
We file income tax returns in the United States, Canada and various foreign and state jurisdictions. We are
subject to income tax examination by tax authorities in all jurisdictions from our inception to date. Our policy is to
recognize interest expense and penalties related to income tax matters as tax expense. At January 30, 2011, we do not
have any significant accruals for interest related to unrecognized tax benefits or tax penalties. Our intercompany
transfer pricing policies will be subject to audits by various foreign tax jurisdictions. Although we believe that our
intercompany transfer pricing policies and tax positions are reasonable, the final determination of tax audits or
potential tax disputes may be materially different from that which is reflected in our income tax provisions and
accruals.
Goodwill and Intangible Assets. Intangible assets are recorded at cost. Non-competition agreements are
amortized on a straight-line basis over their estimated useful life of five years. Reacquired franchise rights are
amortized on a straight-line basis over their estimated useful lives of 10 years. Goodwill represents the excess of the
purchase price over the fair market value of identifiable net assets acquired and is not amortized. Goodwill and
intangible assets with indefinite useful lives are tested for impairment annually or more frequently when an event or
circumstance indicates that goodwill or indefinite useful live intangible assets might be impaired. We use our best
estimates and judgment based on available evidence in conducting the impairment testing. When the carrying amount
exceeds the fair value, an impairment loss is recognized in an amount equal to the excess of the carrying value over
its fair market value.
Stock-Based Compensation. We account for stock-based compensation using the fair value method. The fair
value of awards granted is estimated at the date of grant and recognized as employee compensation expense on a
straight-line basis over the requisite service period with the offsetting credit to additional paid-in capital. Our
calculation of stock-based compensation requires us to make a number of complex and subjective estimates and
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