Restoration Hardware 2014 Annual Report Download - page 88

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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 the Company takes
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.
Certain of the Company’s property and equipment are held under capital leases. These assets are included in
property and equipment and depreciated over the lesser of the useful life of the asset or the lease term. For
buildings held under capital leases, unless the fair value of the land at lease inception exceeds 25% of the
aggregate fair value of the leased land and buildings, 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 buildings), 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.
All other leases are considered operating leases in accordance with ASC 840. Assets subject to an operating
lease and the related lease payments are not recorded on the consolidated balance sheets. For leases that contain
lease incentives, premiums and minimum rent expenses, the Company recognizes rent expense on a straight-line
basis over the lease term. Tenant improvement allowances received from landlords under operating leases are
recorded as deferred rent, reported as a non-current liability on the consolidated balance sheets, and are
amortized on a straight-line basis over the lease term, including the construction period.
Debt Issuance Costs
The Company capitalizes debt issuance costs related to its convertible senior notes and revolving line of
credit. Capitalized costs are included in other assets on the consolidated balance sheets as deferred financing fees
and amortization of such fees are included in interest expense on the consolidated statements of operations.
Deferred financing fees related to the convertible senior notes are amortized utilizing the effective interest
method. Deferred financing fees related to the revolving line of credit are amortized utilizing the straight-line
method.
Revenue Recognition
The Company recognizes revenues and the related cost of goods sold when merchandise is received by its
customers. Revenues from direct-to-customer and home-delivered sales are recognized when the merchandise is
delivered to the customer. Revenues from “cash-and-carry” store sales are recognized at the point of sale in the
store. 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.
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