Restoration Hardware 2014 Annual Report Download - page 85

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Property and Equipment
Property and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation
is calculated using the straight-line method, generally using the following useful lives:
Category of Property and Equipment Useful Life
Building 40 years
Furniture, fixtures and equipment 3 to 7 years
Machinery and equipment 3 to 5 years
Computer software 3 to 7 years
The cost of leasehold improvements and lease acquisitions is amortized over the lesser of the useful life of
the asset or the applicable lease term.
The Company expenses all internal-use software costs incurred in the preliminary project stage and
capitalizes certain direct costs associated with the development and purchase of internal-use software within
property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of
the software, generally not exceeding seven years.
Interest is capitalized on construction in progress and software projects during the period in which
expenditures have been made, activities are in progress to prepare the asset for its intended use and interest
expense is being incurred. The Company capitalized interest of $1.6 million, $0.9 million and $0.9 million in
fiscal 2014, fiscal 2013 and fiscal 2012, respectively. During fiscal 2014, $1.1 million of the $1.6 million
capitalized interest relates to capitalization of non-cash interest associated with the amortization of the debt
discount associated with the convertible senior notes.
Property and equipment acquired under non-cancelable leases, which meet the criteria of capital leases, are
capitalized and amortized over the lesser of the useful life of the asset or the lease term. For buildings held under
capital lease, unless the fair value of the land at lease inception exceeds 25% of the aggregate fair value of the
leased land and building, rent payments under the leases are recognized using the effective interest method as a
reduction of the capital lease obligation and interest expense. Pursuant to ASC 840, at lease inception, if the fair
value of the underlying land exceeds 25% of the fair value of the real estate (land and building), the Company
allocates a portion of the cash payments under the lease to land rent expense equal to the product of the fair value
of the leased land at construction commencement and the Company’s incremental borrowing rate. The remaining
cash payment is treated as debt-service payments and recognized as a reduction of the capital lease obligation
and an increase in interest expense.
The land purchased by the Company is recorded at cost and is a non-depreciable asset.
Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable.
Intangible Assets
Intangible assets reflect the value assigned to trademarks, domain names, core technologies and the fair
market value of the Company’s leases. The Company does not amortize trademarks and domain names as the
Company defines the life of these assets as indefinite.
Impairment
Goodwill
The Company evaluates goodwill annually to determine whether it is impaired. Goodwill is also tested
between annual impairment tests if an event occurs or circumstances change that would indicate that the fair
value of a reporting unit is less than its carrying amount. Conditions that may indicate impairment include, but
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