Pier 1 2013 Annual Report Download - page 46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Properties, maintenance and repairs – Buildings, equipment, furniture and fixtures, and leasehold
improvements are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line
method over estimated remaining useful lives of the assets, generally thirty years for buildings and three to ten
years for equipment, furniture and fixtures. Depreciation of improvements to leased properties is based upon the
shorter of the remaining primary lease term or the estimated useful lives of such assets. Depreciation related to
the Company’s distribution centers is included in cost of sales. All other depreciation costs are included in
depreciation and amortization and were $30,988,000, $21,240,000 and $19,739,000 in fiscal 2013, 2012 and
2011, 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. Impairment, if any, is recorded in
the period in which the impairment occurred. The Company recorded no impairment charges in fiscal 2013 and
2012, and $0.5 million in impairment charges in fiscal 2011. Impairment charges were included in selling,
general and administrative expenses.
Insurance provision – The Company maintains insurance for workers’ compensation and general
liability claims with deductibles of $1,000,000 per occurrence. The liability recorded for such claims is
determined by estimating the total future claims cost for events that occurred prior to the balance sheet date. The
estimates consider historical claims loss development factors as well as information obtained from and
projections made by the Company’s broker, actuary, insurance carriers and third party claims administrators. The
recorded liabilities for workers’ compensation and general liability claims include claims occurring in prior years
but not yet settled and reserves for fees. The recorded liability for workers’ compensation claims and fees was
$21,356,000 and $17,363,000 at March 2, 2013 and February 25, 2012, respectively. The recorded liability for
general liability claims and fees was $5,916,000 and $5,977,000 at March 2, 2013 and February 25, 2012,
respectively.
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 2013 and 2012 were $2,927,000 and
$2,570,000, 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 Operadora 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.
Cost of sales – Cost of sales includes the cost of the merchandise, buying expenses, costs related to the
Company’s distribution network (including depreciation), and store occupancy expenses. The costs incurred by
the Company for shipping and handling 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 or if regulations change, actual gift card breakage may differ from the
amounts recorded. For all periods presented, estimated gift card breakage was recognized 30 months after the
original issuance and was $4,348,000, $3,785,000 and $4,169,000 in fiscal 2013, 2012 and 2011, respectively.
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