Pier 1 2011 Annual Report Download - page 48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the Company’s distribution centers is included in cost of sales. All other depreciation costs are included in
depreciation and amortization. Depreciation costs were $19,739,000, $22,488,000 and $30,556,000 in fiscal
2011, 2010 and 2009, respectively.
Expenditures for maintenance, repairs and renewals that do not materially prolong the original useful
lives of the assets are charged to expense as incurred. In the case of disposals, assets and the related depreciation
are removed from the accounts and the net amount, less proceeds from disposal, is credited or charged to income.
Long-lived assets are reviewed for impairment at least annually and whenever an event or change in
circumstances indicates that their carrying values may not be recoverable. If the carrying value exceeds the sum
of the expected undiscounted cash flows, the assets are considered impaired. For store level long-lived assets,
expected cash flows are estimated based on management’s estimate of future sales, merchandise margin rates,
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. The
Company recorded $0.5 million in impairment charges in fiscal 2011, $0 in impairment charges in fiscal 2010,
and $9.4 million in impairment charges in fiscal 2009. Impairment charges were included in selling, general and
administrative expenses. As the projection of future cash flows requires the use of judgment and estimates, if
actual results differ from the Company’s estimates, additional charges for asset impairments may be recorded in
the future.
Revenue recognition – Revenue is recognized upon customer receipt or delivery for retail sales. 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 2011 and 2010 were $2,340,000 and
$1,690,000, respectively. The Company’s revenues are reported net of discounts and returns, net of sales tax and
third-party credit card fees, and include wholesale sales and royalties received from Sears Roebuck de Mexico
S.A. de C.V. and Corporacion de Tiendas Internationales, 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 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
$4,169,000, $4,648,000 and $4,107,000 in fiscal 2011, 2010 and 2009, respectively.
Leases – The Company leases certain property consisting principally of retail stores, warehouses, its
home office and material handling and office equipment under operating leases expiring through fiscal 2022.
Most retail store locations were 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, including free rent periods prior to the opening of its stores. The portion of rent expense
applicable to a store before opening is included in selling, general and administrative expenses. Once opened for
business, rent expense is included in cost of sales. Certain leases provide for additional rental payments based on
a percentage of sales in excess of a specified base. This additional rent is accrued when it appears that the sales
will exceed the specified base. Construction allowances received from landlords are initially recorded as lease
liabilities and amortized as a reduction of rental expense over the primary lease term.
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