Restoration Hardware 2015 Annual Report Download - page 58

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Capitalized Catalog Costs
Capitalized catalog costs consist primarily of third-party incremental direct costs to prepare, print and distribute Source Books.
Such costs are capitalized and amortized over their expected period of future benefit. Such amortization is based upon the ratio of
actual revenues to the total of actual and estimated future revenues on an individual Source Book basis. Estimated future revenues are
based upon various factors such as the total number of Source Books and pages circulated, the probability and magnitude of consumer
response and the merchandise assortment offered. Each Source Book is generally fully amortized within a twelve-month period after
they are mailed and the majority of the amortization occurs within the first five to nine months, with the exception of the Holiday
Source Books, which are generally fully amortized within a three-month period after they are mailed. Capitalized catalog costs are
evaluated for realizability on a regular basis by comparing the carrying amount associated with each Source Book to the estimated
probable remaining future sales associated with that Source Book.
Our catalog amortization calculation requires management to make assumptions and to apply judgment regarding a number of
factors, including market conditions, the selling environment and the probability and magnitude of consumer response to certain
Source Books and merchandise assortment offered. If actual revenues associated with our Source Books differ from our original
estimates, we adjust our catalog amortization schedules accordingly. We do not believe that changes in the assumptions used in these
estimates would have a significant effect on our net income as changes in the assumptions do not impact the total cost of the Source
Books to be amortized. However, changes in the assumptions could impact the timing of the future catalog amortization expense
recorded to the consolidated statement of operations.
Website and Print Advertising
Website and print advertising expenses, which include e-commerce advertising, web creative content and direct marketing
activities such as print media, radio and other media advertising, are expensed as incurred or upon the release of the content or the
initial advertisement.
Impairment of Goodwill and Long-Lived Assets
Goodwill
We evaluate 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 are not limited to, a significant adverse change in customer demand or business
climate that could affect the value of an asset; general economic conditions, such as increasing Treasury rates or unexpected changes
in gross domestic product growth; a change in our market share; budget-to-actual performance and consistency of operating margins
and capital expenditures; a product recall or an adverse action or assessment by a regulator; or changes in management or key
personnel. If an impairment indicator exists, we test the intangible asset for recoverability. We have identified only one single
reporting unit. We selected the fourth fiscal quarter to perform our annual goodwill impairment testing.
We qualitatively assess goodwill impairment to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. During fiscal 2015, we performed a qualitative analysis examining key events and circumstances
affecting fair value and determined it is more likely than not that the reporting unit’s fair value is greater than its carrying amount. As
such, no further analysis was required for purposes of testing of our goodwill for impairment.
For goodwill not qualitatively assessed or if goodwill is qualitatively assessed and it is determined it is not more likely than not
that the reporting unit’s fair value is greater than its carrying amount, a two-step quantitative approach is used. In the first step, we
compare the fair value of the reporting unit, generally defined as the same level as or one level below an operating segment, to its
carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is
considered not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the
reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to
determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its
implied fair value, then we would record an impairment loss equal to the difference. The assumptions used in such valuations are
subject to volatility and may differ from actual results.
Our tests for impairment of goodwill resulted in a determination that the fair value of the Company substantially exceeded the
carrying value of our net assets as of January 30, 2016. We do not anticipate any material impairment charges in the near term.