Pier 1 2012 Annual Report Download - page 39

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IMPACT OF NEW ACCOUNTING STANDARDS
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05,
“Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which amends current
comprehensive income guidance. This accounting update eliminates the option to present the components of
other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report
comprehensive income in either a single continuous statement of comprehensive income which contains two
sections, net income and other comprehensive income, or in two separate but consecutive statements. This
guidance will be effective for the Company beginning in fiscal 2013. The Company does not expect the guidance
to impact its consolidated financial statements, as it only requires a change in the format of presentation.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market risks relating to the Company’s operations result primarily from changes in foreign exchange
rates and interest rates. The Company has only limited involvement with derivative financial instruments, does
not use them for trading purposes and is not a party to any leveraged derivatives. Collectively, the Company’s
exposure to market risk factors is not significant and has not materially changed from February 26, 2011.
Foreign Currency Risk
Though the majority of the Company’s inventory purchases are made in U.S. dollars in order to limit its
exposure to foreign currency fluctuations, the Company, from time to time, enters into forward foreign currency
exchange contracts. The Company uses such contracts to hedge exposures to changes in foreign currency
exchange rates associated with purchases denominated in foreign currencies, primarily euros. The Company
operates stores in Canada and is subject to fluctuations in currency conversion rates related to those operations.
On occasion, the Company may consider utilizing contracts to hedge its exposure associated with repatriation of
funds from its Canadian operations. Changes in the fair value of the derivatives are included in the Company’s
consolidated statements of operations as such contracts are not designated as hedges under the applicable
accounting guidance. Forward contracts that hedge merchandise purchases generally have maturities not
exceeding six months. Changes in the fair value and settlement of these forwards are included in cost of sales. At
February 25, 2012, there were no material outstanding contracts to hedge exposure associated with the
Company’s merchandise purchases denominated in foreign currencies or the repatriation of Canadian funds.
Interest Rate Risk
The Company manages its exposure to changes in interest rates by optimizing the use of variable and
fixed rate debt. The interest rate exposure on the Company’s secured credit facility and industrial revenue bonds
is based upon variable interest rates and therefore is affected by changes in market interest rates. As of
February 25, 2012, the Company had $9.5 million in long-term debt outstanding related to its industrial revenue
bonds and no cash borrowings outstanding on its secured credit facility. A hypothetical 10% adverse change in
the interest rates applicable to either or both of these variable rate instruments would have a negligible impact on
the Company’s earnings and cash flows.
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