Pier 1 2013 Annual Report Download - page 47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 2029.
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.
Advertising costs – Advertising production costs are expensed the first time the advertising takes place.
Advertising costs were $71,214,000, $62,405,000 and $55,723,000 in fiscal 2013, 2012 and 2011, respectively.
Prepaid advertising at the end of fiscal years 2013 and 2012 was $2,426,000 and $2,008,000, respectively.
Defined benefit plans – The Company maintains supplemental retirement plans (the “Plans”) for certain
of its current and former executive officers. The Plans provide that upon death, disability, reaching retirement
age or certain termination events, a participant will receive benefits based on highest compensation, years of
service and years of plan participation. These benefit costs are dependent upon numerous factors, assumptions
and estimates. Benefit costs may be significantly affected by changes in key actuarial assumptions such as the
discount rate, compensation increase rates, or retirement dates used to determine the projected benefit obligation.
Additionally, changes made to the provisions of the Plans may impact current and future benefit costs. In
accordance with accounting rules, changes in benefit obligations associated with these factors may not be
immediately recognized as costs in the statement of operations, but recognized in future years over the remaining
average service period of plan participants. See Note 5 of the Notes to Consolidated Financial Statements for
further discussion.
Income taxes – The Company accounts for income taxes using the asset and liability method. Under this
method, deferred tax assets and liabilities are determined based on differences between financial reporting and
income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Deferred tax assets and liabilities are recorded in the
Company’s consolidated balance sheet and are classified as current or noncurrent based on the classification of
the related assets or liabilities for financial reporting purposes. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized. In
assessing the need for a valuation allowance, all available evidence is considered including past operating results,
estimates of future income, and tax planning strategies. The Company is subject to income tax in many
jurisdictions, including the United States, various states and localities, and foreign countries. At any point in
time, multiple tax years are subject to audit by various jurisdictions and the Company records estimated reserves
for uncertain tax benefits for foreign and domestic tax audits. However, negotiations with taxing authorities may
yield results different from those currently estimated. See Note 8 of the Notes to Consolidated Financial
Statements for further discussion.
Earnings per share – Basic earnings per share amounts were determined by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted earnings per share amounts were
similarly computed, and have included the effect, if dilutive, of the Company’s weighted average number of
stock options outstanding and shares of unvested restricted stock.
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