Lululemon 2011 Annual Report Download - page 60

Table of Contents
The recognition of a deferred income tax asset is based primarily on management’s forecasts, including current and proposed tax
legislation, current and anticipated taxable income, utilization of previously unrealized non-operating loss carryforwards and regulatory reviews
of tax filings. Given the judgments and estimates required and the sensitivity of the results to the significant assumptions used, 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.
The Company provides for taxes at the rate applicable for the appropriate tax jurisdiction. Because present intentions are to reinvest the
unremitted earnings into foreign operations, the Company does not provide U.S. income taxes on unremitted earnings of foreign subsidiaries.
Management periodically assesses the need to utilize these unremitted earnings to finance 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.
The Company files income tax returns in the United States, Canada and various foreign and state jurisdictions. The Company is 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 a selling, general and administrative expense. At January 29, 2012, the Company does not have any significant
accruals for interest related to unrecognized tax benefits or tax penalties. Intercompany transfer pricing policies are currently subject to audits by
various foreign tax jurisdictions. Although management believes that the Company’
s 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 the
Company’s income tax provisions and accruals.
Currency translation
The functional currency for each entity included in these consolidated financial statements that is domiciled outside of the United States
(the foreign entities) is the applicable local currency. Assets and liabilities of each foreign entity are translated into U.S. dollars at the exchange
rate in effect on the balance sheet date. Revenue and expenses are translated at the average rate in effect during the period. Unrealized translation
gains and losses are recorded as a cumulative translation adjustment, which is included in other comprehensive income or loss, which is a
component of accumulated other comprehensive income included in stockholders’ equity.
Foreign currency transactions denominated in a currency other than an entity’s functional currency are remeasured into the functional
currency with any resulting gains and losses included in income, except for gains and losses arising on intercompany foreign currency
transactions that are of a long-term investment nature.
Fair value of financial instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, trade accounts payable, accrued liabilities,
and other liabilities. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or
credit risks arising from these financial instruments. All foreign exchange gains or losses are recorded in the consolidated statements of
operations under selling, general and administrative expenses. The fair value of these financial instruments approximates their carrying value,
unless otherwise noted.
Foreign exchange risk
A significant portion of the Company’s sales are denominated in Canadian dollars. The Company’s exposure to foreign exchange risk is
mainly related to fluctuations between the Canadian dollar and the U.S. dollar. This exposure is partly mitigated by a natural hedge in that a
significant portion of the Company’s
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