Restoration Hardware 2014 Annual Report Download - page 72

Income Taxes
We account for income taxes under an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been recognized in our
consolidated financial statements or tax returns. In estimating future tax consequences, we generally take into
account all expected future events then known to us, other than changes in the tax law or rates which have not yet
been enacted and which are not permitted to be considered. Accordingly, we may record a valuation allowance to
reduce our net deferred tax assets to the amount that is more-likely-than-not to be realized. The determination as
to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based upon management’s
best estimate of the recoverability of our net deferred tax assets. Future taxable income and ongoing prudent and
feasible tax planning are considered in determining the amount of the valuation allowance, and the amount of the
allowance is subject to adjustment in the future. Specifically, in the event we are to determine that we are not
more-likely-than-not able to realize our net deferred tax assets in the future, an adjustment to the valuation
allowance would decrease income in the period such determination is made. This allowance does not alter our
ability to utilize the underlying tax net operating loss and credit carryforwards in the future, the utilization of
which is limited to achieving future taxable income.
In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the
likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more-likely-than-
not the deferred tax assets will not be realized, we record a valuation allowance. The weight given to the positive and
negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is
generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable
temporary differences to outweigh objective negative evidence of recent financial reporting losses. United States
GAAP states that cumulative losses in recent years are a significant piece of negative evidence that is difficult to
overcome in determining that a valuation allowance is not needed against deferred tax assets.
Due to the historical losses incurred, we had recorded a full valuation allowance against the U.S. net
deferred tax assets, excluding deferred tax liabilities related to indefinite lived intangibles, as well as against the
net deferred tax assets in Shanghai.
A sustained period of profitability in our operations was required before we would change our judgment
regarding the need for a full valuation allowance against our net deferred tax assets. Although we were profitable for
the full fiscal 2011, the seasonality of our business continued to result in losses during certain quarters. We recorded a
net loss of $3.7 million in the first quarter of fiscal 2012, compared to a net loss of $6.2 million in the same quarter of
fiscal 2011, and net income of $17.6 million in the second quarter of fiscal 2012, compared to net income of $7.6
million in the same quarter of fiscal 2011. Due to the seasonality that was then affecting our business, historically our
full year results substantially depended on the results from operations in the fourth quarter.
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 January 31, 2015, we have retained a valuation allowance totaling $0.2
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.
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