Restoration Hardware 2012 Annual Report Download - page 130

be recoverable. 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, a product recall or an adverse action
or assessment by a regulator. If the sum of the estimated undiscounted future cash flows related to the asset are less
than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value,
usually determined by the estimated discounted cash flow analysis of the asset.
We evaluate long-lived tangible assets at an individual store level, which is the lowest level at which
independent cash flows can be identified. We evaluate corporate assets or other long-lived assets that are not
store-specific at the consolidated level.
Since there is typically no active market for our long-lived tangible assets, we estimate fair values based on
the expected future cash flows. We estimate future cash flows based on store-level historical results, current
trends, and operating and cash flow projections. Our estimates are subject to uncertainty and may be affected by
a number of factors outside our control, including general economic conditions and the competitive environment.
While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges
may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to
revise our estimates.
Stock-Based Compensation
In the third quarter of fiscal 2012, we changed our policy for recognizing stock-based compensation expense
from the graded method of accounting to the straight-line method of accounting for our time-based units (or service-
only) awards. Based on research and analysis, we believe the straight-line method of accounting for stock-based
compensation expense for service-only awards is the predominant method used in our industry. In order for our
results of operations to be comparable to our peers, we have concluded that the straight-line method of accounting
for stock-based compensation is a preferable accounting method in accordance with ASC 250-10-45.
We account for stock-based compensation in accordance with applicable guidance which requires the fair
value of stock-based payments to be recognized in the consolidated financial statements as compensation expense
over the requisite service period. For service-only awards compensation expense is recognized on a straight-line
basis, net of forfeitures, over the requisite service period for the fair value of awards that actually vest. Fair value for
restricted stock units is valued using the closing price of our stock on the date of grant. The fair value of each option
award granted under our award plans subsequent to our initial public offering is estimated on the date of grant using
a Black-Scholes Merton option pricing model with the following assumptions:
• Expected volatility—Based on the lack of historical data for our own shares, we base our expected
volatility on a representative peer group that takes into account industry, market capitalization, stage of
life cycle and capital structure.
• Expected term—Represents the period of time that options granted are expected to be outstanding. We
elected to calculate the expected term of the option awards using the “simplified method”. This election
was made as we do not have sufficient historical exercise data to provide a reasonable basis upon
which to estimate expected term. Under the “simplified” calculation method, the expected term is
calculated as an average of the vesting period and the contractual life of the options.
• Risk-free interest rate—Based on the U.S. Treasury zero-coupon bond rate with a remaining term
approximate of the expected term of the option.
• Dividend yield—As we have not paid dividends, nor do we currently plan to pay dividends in the
future, the assumed dividend yield is zero.
Prior to the Reorganization, Home Holdings had granted performance-based units that vested and became
deliverable upon achievement or satisfaction of performance conditions specified in the performance agreement or
upon the return on investment attained by certain of the equity investors in Home Holdings at defined liquidity
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