Restoration Hardware 2012 Annual Report Download - page 128

financial statements have not been materially impacted by such variances. More information on all of our
significant accounting policies can be found in Note 4—Significant Accounting Policies to our audited
consolidated financial statements.
Revenue Recognition
We recognize revenues and the related cost of goods sold when merchandise is received by our customers.
Revenues from “cash-and-carry” store sales are recognized at the point of sale in the store. Revenues from direct-
to-customer and home-delivered sales are recognized when the merchandise is delivered to the customer.
Discounts provided to customers are accounted for as a reduction of sales.
We recognize shipping and handling fees as revenue when the merchandise is received by our customers.
Costs of shipping and handling are included in cost of goods sold.
Sales tax collected is not recognized as revenue as it is ultimately remitted to governmental authorities.
We reserve for projected merchandise returns based on actual, historical experience and various other
assumptions that we believe to be reasonable. Actual merchandise returns are monitored regularly and have not
been materially different from the estimates recorded. Merchandise returns are granted for various reasons,
including delays in product delivery, product quality issues, customer preference and other similar matters.
Product returned often represents merchandise that can be resold. Amounts refunded to customers are generally
made by issuing the same payment tender as used in the original purchase. Merchandise exchanges of the same
product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales
returns reserve.
Gift Certificates and Merchandise Credits
We sell gift certificates and issue merchandise credits to our customers in our stores and through our
websites and product catalogs. Such gift certificates and merchandise credits do not have expiration dates.
Revenue associated with gift certificates and merchandise credits is deferred until either (i) redemption of the gift
certificate and merchandise credits or (ii) when the likelihood of redemption is remote and there exists no legal
obligation to remit the value of unredeemed gift certificates or merchandise credits to the relevant jurisdictions
(breakage). The breakage rate is based on monitoring of certificates issued, actual certificate redemptions and our
analysis of when we believe it is remote that redemptions will occur.
Redeemed gift certificates and merchandise credits are recorded in net revenues. The liability for
unredeemed gift certificates and merchandise credits is reversed to selling, general and administrative expenses
when it is determined that certificates will not be redeemed.
Merchandise Inventories
Our merchandise inventories are composed of finished goods and are carried at the lower of cost or market,
with cost determined on a weighted-average cost method and market determined based on the estimated net
realizable value. To determine if the value of inventory should be marked down below original cost, we consider
current and anticipated demand, customer preference and the merchandise age. The inventory value is adjusted
periodically to reflect current market conditions, which requires management judgments that may significantly
affect the ending inventory valuation, as well as gross margin. The significant estimates used in inventory
valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves)
and estimates of inventory shrinkage. We adjust our inventory for obsolescence based on historical trends, aging
reports, specific identification and our estimates of future retail sales prices.
Reserves for shrinkage are estimated and recorded throughout the period as a percentage of net sales based
on historical shrinkage results and current inventory levels. Actual shrinkage is recorded throughout the year
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