Restoration Hardware 2014 Annual Report Download - page 70

Download and view the complete annual report

Please find page 70 of the 2014 Restoration Hardware annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 128

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128

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 is 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.
Lease Accounting
We lease stores, distribution facilities, office space and, less significantly, certain machinery and equipment.
We classify leases at the inception of the lease as a capital lease or an operating lease.
Build-to-Suit Lease Transactions
We are sometimes involved in the construction of leased stores, which, depending on the extent to which we
are involved, we may be the “deemed owner” of the leased premises for accounting purposes during the
construction period pursuant to ASC 840—Leases (“ASC 840”). If we are the “deemed owner” for accounting
purposes, upon commencement of the construction project, we are required to capitalize the cash and non-cash
assets contributed by the landlord for construction as property and equipment on our consolidated balance sheets.
Upon completion of the construction project, we perform a sale-leaseback analysis to determine if we do not
have any forms of “continuing involvement” and therefore can remove the assets and related liabilities from our
consolidated balance sheets. If the assets and related liabilities cannot be removed from our consolidated balance
sheets, we account for the transactions as a financing lease. These lease transactions are referred to as build-to-
suit lease transactions.
Rent expense relating to the land is recognized on a straight-line basis once construction begins, which is
determined using the fair value of the leased land at construction commencement and our incremental borrowing
rate. Once cash payments commence under the lease, all amounts in excess of land rent expense are recorded as a
debt-service payment and are recognized as interest expense and a reduction of the financing obligation.
Similar to capital leases, the expense recorded within the consolidated statements of operations over the
lease term is equal to the cash rent payments made under the lease. The primary difference in the consolidated
statements of operations between build-to-suit lease transactions and operating leases is the timing of recognition
and the classification of expenses. Expenses related to operating leases are classified as rent expense compared to
expenses related to build-to-suit lease transactions which are classified as a combination of rent expense,
depreciation expense and interest expense.
Operating and Capital Leases
In a capital or an operating lease, the expected lease term begins with the date that we take possession of the
equipment or the leased space for construction and other purposes. The expected lease term may also include the
exercise of renewal options if the exercise of the option is determined to be reasonably assured. The expected
term is also used in the determination of whether a store is a capital or operating lease.
66