Restoration Hardware 2015 Annual Report Download - page 59

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Long-Lived Assets
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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, 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. 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.
The contributions by the landlord toward construction, including the building, existing site improvements at construction
commencement and any amounts paid by the landlord to those responsible for construction, are included as property and equipment
additions due to build-to-suit lease transactions within the non-cash section of our consolidated statements of cash flows. However,
over the lease term, these non-cash additions to property and equipment due to build-to-suit lease transactions do not impact our cash
outflows, nor do they impact net income within our consolidated statements of income.
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 income over the lease term is equal to the
cash rent payments made under the lease. The primary difference in the consolidated statements of income 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.