Pier 1 2007 Annual Report Download - page 45

and expenses over the remaining expected terms of the leases. Impairment is measured as the amount by
which the carrying value of the asset exceeds the fair value of the asset. Fair value is determined by
discounting expected cash flows. Impairment, if any, is recorded in the period in which the impairment
occurred. Impairment charges were $31,947,000, $5,601,000 and $370,000 in fiscal 2007, 2006 and 2005,
respectively, and included in selling, general and administrative expenses.
Goodwill and intangible assets — The Company applies the provisions of SFAS No. 142, “Goodwill and
Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives are not
amortized, but instead are tested for impairment at least annually. In accordance with SFAS No. 142, the
Company’s reporting units were identified as components, and the goodwill assigned to each represents the
excess of the original purchase price over the fair value of the net identifiable assets acquired for that
component. The Company completed the annual impairment tests as of March 3, 2007 and February 25, 2006
for fiscal 2007 and 2006, respectively. Fair value was determined through analyses of discounted future cash
flows for the applicable reporting units. The analysis resulted in a write-down of goodwill and intangible
assets, included in selling, general and administrative expenses, of approximately $4,422,000 in fiscal 2007,
primarily related to Pier 1 Kids, and $239,000 in fiscal 2006. No impairment loss was recognized in fiscal
2005. See Note 5 of the Notes to Consolidated Financial Statements for additional discussion of goodwill and
intangible assets.
Revenue recognition — Revenue is recognized upon customer receipt or delivery for retail sales, net of
sales tax and third party credit card processing fees, including sales under deferred payment promotions on the
Company’s proprietary credit card. As a result of the sale of the Company’s credit card business in fiscal
2007, these deferred programs will result in an upfront reduction of sales based on the fees charged by Chase
Bank USA N.A. (“Chase”) for such programs going forward. A reserve has been established for estimated
merchandise returns based upon historical experience and other known factors. The reserves for estimated
merchandise returns at the end of fiscal years 2007 and 2006 were $3,215,000 and $3,060,000, respectively.
The Company’s revenues are reported net of discounts and returns, and include wholesale sales and royalties
received from franchise stores and Sears Roebuck de Mexico S.A. de C.V. Amounts billed to customers for
shipping and handling are included in net sales and the costs incurred by the Company for these items are
recorded in cost of sales.
Gift cards — Revenue associated with gift cards is recognized upon redemption of the gift card. Gift card
breakage is estimated and recorded as income based upon an analysis of the Company’s historical redemption
patterns and represents the remaining unused portion of the gift card liability for which the likelihood of
redemption is remote. If actual redemption patterns vary from the Company’s estimates, actual gift card
breakage may differ from the amounts recorded. For all periods presented, gift card breakage was recognized
after a period of 30 months from the original issuance and was $6,222,000, $5,062,000 and $4,452,000 in
fiscal 2007, 2006 and 2005, respectively.
Leases — The Company leases certain property consisting principally of retail stores, warehouses, and
material handling and office equipment under leases expiring through fiscal 2022. Most retail store locations
are leased for primary terms of ten years with varying renewal options and rent escalation clauses. Escalations
occurring during the primary terms of the leases are included in the calculation of the minimum lease
payments, and the rent expense related to these leases is recognized on a straight-line basis over this lease
term. Prior to fiscal 2005, the Company recognized straight-line rent expense for store leases beginning on the
earlier of the rent commencement date or the store opening date, which had the effect of excluding the build-
out period of its stores from the calculation of the period over which it expenses rent. During the fourth
quarter of fiscal 2005, the Company revised its accounting practices to extend the lease term to include this
free rent period prior to the opening of its stores. This revision in practice resulted in a cumulative pre-tax
charge of $6,264,000 for leases entered into prior to fiscal 2005, which was not material to any previously
reported fiscal year. This cumulative adjustment had no effect on historical or future cash flows from
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Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)