Pier 1 2009 Annual Report Download - page 41

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company’s consolidated financial statements in accordance with accounting
principles generally accepted in the United States requires the use of estimates that affect the reported
value of assets, liabilities, revenues and expenses. These estimates are based on historical experience
and various other factors that are believed to be reasonable under the circumstances, the results of
which form the basis for the Company’s conclusions. The Company continually evaluates the
information used to make these estimates as the business and the economic environment changes.
Historically, actual results have not varied materially from the Company’s estimates, with the exception
of the impairment of long-lived assets, the early retirement of participants in its defined benefit plans,
and income taxes as discussed below. The Company does not currently anticipate a significant change
in its assumptions related to these estimates. Actual results may differ from these estimates under
different assumptions or conditions. The Company’s significant accounting policies can be found in
Note 1 of the Notes to Consolidated Financial Statements. The policies and estimates discussed below
include the financial statement elements that are either judgmental or involve the selection or
application of alternative accounting policies and are material to the Company’s financial statements.
Unless specifically addressed below, the Company does not believe that its critical accounting policies
are subject to market risk exposure that would be considered material and as a result, has not provided
a sensitivity analysis. The use of estimates is pervasive throughout the consolidated financial statements,
but the accounting policies and estimates considered most critical are as follows:
Revenue recognition—The Company recognizes revenue from retail sales, net of sales tax and
third-party credit card fees, upon customer receipt or delivery of merchandise, including sales under
deferred payment promotions on its proprietary credit card in fiscal 2007 and prior years. The
Company records an allowance for estimated merchandise returns based upon historical experience and
other known factors. Should actual returns differ from the Company’s estimates and current provision
for merchandise returns, revisions to the estimated merchandise returns may be required.
Gift cards—Revenue associated with gift cards is recognized when merchandise is sold and a gift
card is redeemed as payment. Gift card breakage is estimated and recorded as income based upon an
analysis of the Company’s historical data and expected trends in 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 at 30 months
from the original issuance and was $4.1 million, $1.7 million and $6.2 million in fiscal 2009, 2008 and
2007, respectively.
Inventories—The Company’s inventory is comprised of finished merchandise and is stated at the
lower of weighted average cost or market value. Cost is calculated based upon the actual landed cost of
an item at the time it is received in the Company’s warehouse using actual vendor invoices, the cost of
warehousing and transporting product to the stores and other direct costs associated with purchasing
products. Carrying values of inventory are analyzed and to the extent that the cost of inventory exceeds
the expected selling prices less reasonable costs to sell, provisions are made to reduce the carrying
amount of the inventory. The Company reviews its inventory levels in order to identify slow-moving
merchandise and uses merchandise markdowns to sell such merchandise. Markdowns are recorded to
reduce the retail price of such slow-moving merchandise as needed. Since the determination of carrying
values of inventory involves both estimation and judgment with regard to market values and reasonable
costs to sell, differences in these estimates could result in ultimate valuations that differ from the
recorded asset. The majority of inventory purchases and commitments are made in U.S. dollars in
order to limit the Company’s exposure to foreign currency fluctuations.
The Company recognizes known inventory losses, shortages and damages when incurred and makes
a provision for estimated shrinkage. The amount of the provision is estimated based on historical
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