Restoration Hardware 2012 Annual Report Download - page 129

based upon periodic cycle counts and the results of our annual physical inventory count. Actual inventory
shrinkage and obsolescence can vary from estimates due to factors including the mix of our inventory (which
ranges from large furniture to decorative accessories) and execution against loss prevention initiatives in our
stores, distribution centers, off-site storage locations and with third-party transportation providers.
Due to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates have
calculations that require management to make assumptions and to apply judgment regarding a number of factors,
including market conditions, the selling environment, historical results and current inventory trends. If actual
observed obsolescence or periodic updates of our shrinkage estimates differ from our original estimates, we
adjust our inventory reserves accordingly throughout the period. Management does not believe that changes in
the assumptions used in these estimates would have a significant effect on our net income or inventory balances.
We have not made any material changes to our assumptions included in the calculations of the obsolescence and
shrinkage reserves during the periods presented or recorded significant adjustments related to the physical
inventory process.
Impairment of Goodwill and Long-Lived Assets
Goodwill
We evaluate goodwill annually to determine whether it is impaired. Goodwill is also tested between annual
impairment tests if an event occurs or circumstances change that would indicate that the fair value of a reporting
unit is less than its carrying amount. Conditions that may indicate impairment include, but are not limited to, a
significant adverse change in customer demand or business climate that could affect the value of an asset; general
economic conditions, such as increasing Treasury rates or unexpected changes in gross domestic product growth;
a change in our market share; budget-to-actual performance and consistency of operating margins and capital
expenditures; a product recall or an adverse action or assessment by a regulator; or changes in management or
key personnel. If an impairment indicator exists, we test the intangible asset for recoverability. We have
identified only one single reporting unit. We selected the fourth fiscal quarter to perform our annual goodwill
impairment testing.
We qualitatively assess goodwill impairment to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. During fiscal 2012, we performed a qualitative analysis
examining key events and circumstances affecting fair value and determined it is more likely than not that the
reporting unit’s fair value is greater than its carrying amount. As such, no further analysis was required for
purposes of testing of our goodwill for impairment.
For goodwill not qualitatively assessed, a two-step quantitative approach is used. In the first step, we
compare the fair value of the reporting unit, generally defined as the same level as or one level below an
operating segment, to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the
net assets assigned to that unit, goodwill is considered not impaired and we are not required to perform further
testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting
unit, then we must perform the second step of the impairment test in order to determine the implied fair value of
the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value,
then we would record an impairment loss equal to the difference. The assumptions used in such valuations are
subject to volatility and may differ from actual results.
Our tests for impairment of goodwill resulted in a determination that the fair value of the Company
substantially exceeded the carrying value of our net assets as of February 2, 2013. We do not anticipate any
material impairment charges in the near term.
Long-Lived Assets
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
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Form 10-K