Restoration Hardware 2012 Annual Report Download - page 132

By the end of fiscal 2012, our U.S. operations achieved a position of cumulative profits (adjusted for
permanent items) for the most recent three-year period. We concluded that this record of cumulative profitability
in recent years, coupled with our business plan for profitability in future periods, provided assurance that our
future tax benefits are more likely than not to be realized. Accordingly, in the fourth quarter of fiscal 2012, we
released all of our U.S. valuation allowance against net deferred tax assets, resulting in a $57.2 million benefit in
our provision for income taxes. At February 2, 2013, we have retained a valuation allowance totaling $0.3
million against deferred tax assets for our Shanghai operations.
The accounting standard for uncertainty in income taxes prescribes a recognition threshold that a tax
position is required to meet before being recognized in the financial statements and provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition issues. Differences between tax positions taken in a tax return and amounts recognized in the financial
statements generally result in an increase in a liability for income taxes payable or a reduction of an income tax
refund receivable, or a reduction in a deferred tax asset or an increase in a deferred tax liability, or both. We
recognize interest and penalties related to unrecognized tax benefits in tax expense.
Recently Issued Accounting Pronouncements
Indefinite-Lived Intangible Assets
In July 2012, the Financial Accounting Standards Board issued guidance that revises the requirements
around how entities test indefinite-lived intangible assets other than goodwill for impairment. Similar to the
guidance issued in September 2011 related to the testing of goodwill for impairment, this guidance allows
companies to perform a qualitative assessment before calculating the fair value of the indefinite-lived intangible
asset. If entities determine, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible
asset is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. We
adopted this guidance for our fiscal 2012 annual indefinite-lived intangible assets impairment test. The adoption
of this guidance resulted in a change in how we performed our indefinite-lived intangible assets impairment
assessment; however, the adoption did not have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosure of Market Risks
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our revolving line of credit and,
prior to its repayment on November 7, 2012, our term loan, which bear interest at variable rates. At February 2,
2013, $82.5 million was outstanding under the revolving line of credit. As of February 2, 2013, the undrawn
borrowing availability under the revolving line of credit was $188.5 million, and there were $19.5 million in
outstanding letters of credit. We currently do not engage in any interest rate hedging activity and we have no
intention to do so in the foreseeable future. Based on the average interest rate on the revolving line of credit
during the year ended February 2, 2013, and to the extent that borrowings were outstanding, we do not believe
that a 10% change in the interest rate would have a material effect on our consolidated results of operations or
financial condition.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult
to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the
effects of inflation, if any, on our results of operations and financial condition have been immaterial.
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