Pier 1 2014 Annual Report Download - page 44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2014 and 2013 were $2,748,000 and $2,927,000, 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 $4,455,000, $4,348,000 and $3,785,000 in fiscal 2014, 2013 and
2012, 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 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 and all other
advertising costs are expensed as incurred. Advertising costs were $76,071,000, $71,214,000 and $62,405,000 in fiscal 2014,
2013 and 2012, respectively. Prepaid advertising at the end of fiscal years 2014 and 2013 was $2,951,000 and $2,426,000,
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, provinces, 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
40 PIER 1 IMPORTS, INC. 2014 Form 10-K