Restoration Hardware 2012 Annual Report Download - page 144

Capital and Operating Leases
The Company classifies leases at the inception of the lease as either a capital lease or an operating lease. A
lease is classified as a capital lease if any of the following conditions are met: (i) the ownership of the leased
property is transferred to the lessee by the end of the lease term, (ii) there is a bargain purchase option, (iii) the
lease term is at least 75% of the property’s estimated remaining economic life or (iv) the present value of the
minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased
property. A capital lease is accounted for as if there were an acquisition of an asset and an incurrence of an
obligation at the inception of the lease. All leases not identified as capital leases are accounted for as operating
leases.
The Company leases stores, distribution facilities, office space and certain machinery and equipment under
various operating leases. Most real estate lease agreements contain, among other terms and conditions, tenant
improvement allowances, rent holidays, lease premiums, rent escalation clauses and contingent rent provisions.
For purposes of recognizing lease incentives, premiums and minimum rental expenses on a straight-line basis
over the terms of the leases, the Company uses the date of initial possession to begin amortization, which is
generally when the Company enters the space and begins to make improvements in preparation of intended use.
For tenant improvement allowances and rent holidays, the Company records a deferred rent liability, reported as
a long-term liability on the consolidated balance sheets, and amortizes the deferred rent over the term of the lease
as an adjustment to rent expense.
For scheduled rent changes during the lease terms or for rental payments commencing at a date other than
the date of initial occupancy (rent holidays), the Company records minimum rental expenses on a straight-line
basis over the term of the lease.
Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of
specified levels. The Company records a contingent rent liability in accounts payable and accrued expenses on
the consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or
when management estimates that achieving the specified levels during the lease term is probable.
Debt Issuance Costs
The Company capitalizes debt issuance costs related to its revolving line of credit and term loan. Capitalized
costs related to the revolving line of credit are included in other assets on the consolidated balance sheets as
deferred financing fees. Capitalized costs paid to lenders relating to the term loan are netted against the term loan
on the consolidated balance sheets. Deferred financing fees are amortized utilizing the straight-line method and
are included in interest expense on the consolidated statements of operations.
Revenue Recognition
The Company recognizes revenues and the related cost of goods sold when merchandise is received by its
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.
The Company recognizes shipping and handling fees as revenue when the merchandise is received by its
customers. Costs of shipping and handling are included in cost of goods sold.
Sales tax collected is not recognized as revenue but is included in accounts payable and accrued expenses on
the consolidated balance sheets as it is ultimately remitted to governmental authorities.
The Company reserves for projected merchandise returns. Merchandise returns are often resaleable
merchandise and are refunded by issuing the same payment tender of the original purchase. Merchandise
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