Restoration Hardware 2015 Annual Report Download - page 75

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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, the Company recognizes 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.
The Company evaluates long-lived tangible assets at an individual store level, which is the lowest level at which independent
cash flows can be identified. The Company evaluates corporate assets and other long-lived assets that are not store-specific at the
consolidated level.
Since there is typically no active market for the Company’s long-lived tangible assets, the Company estimates fair values based
on the expected future cash flows. The Company estimates future cash flows based on store-level historical results, current trends, and
operating and cash flow projections. The Company’s estimates are subject to uncertainty and may be affected by a number of factors
outside its control, including general economic conditions and the competitive environment. While the Company believes its 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 the Company to revise its estimates.
The Company recorded an impairment charge in fiscal 2013 of $1.4 million related to the underperformance of a stand-alone
RH Baby & Child Gallery, which is included in selling, general and administrative expenses on the consolidated statements of income.
The Company did not record an impairment charge on long-lived assets in fiscal 2015 or fiscal 2014.
Lease Accounting
The Company leases stores, distribution facilities, office space and, less significantly, certain machinery and equipment. The
Company classifies leases at the inception of the lease as a capital lease or an operating lease.
Build-to-Suit Lease Transactions
The Company is sometimes involved in the construction of leased stores, which, depending on the extent to which it is involved,
the Company may be the “deemed owner” of the leased premises for accounting purposes during the construction period pursuant to
ASC 840. If the Company is the “deemed owner” for accounting purposes, upon commencement of the construction project, it is
required to capitalize the cash and non-cash assets contributed by the landlord for construction as property and equipment on its
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 the 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 the Company’s cash outflows, nor do they impact net income within the consolidated statements of income.
Upon completion of the construction project, the Company performs a sale-leaseback analysis to determine if it does not have
any forms of “continuing involvement” and therefore can remove the assets and related liabilities from its consolidated balance sheets.
If the assets and related liabilities cannot be removed from the Company’s consolidated balance sheets, the Company accounts 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 the Company’s 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.