Restoration Hardware 2015 Annual Report Download - page 76

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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 in deferred rent and lease incentives on the consolidated balance sheets,
and are amortized on a straight-line basis over the lease term.
During fiscal 2015, the Company received $9.2 million related to profit participation arrangements for two of its distribution
center facilities. Such amounts were recorded in deferred rent and lease incentives on the consolidated balance sheets and will be
amortized on a straight-line basis over the respective lease terms.
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 non-current assets on the consolidated balance sheets as deferred financing fees and convertible debt issuance
costs and amortization of such fees are included in interest expense on the consolidated statements of income. Deferred financing fees,
and convertible debt issuance costs 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 or other accommodations 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.
The Company reserves for projected merchandise returns. Merchandise returns are often resalable merchandise and are refunded
by issuing the same payment tender of the original purchase. Merchandise exchanges of the same product and price are not considered
merchandise returns and, therefore, are excluded when calculating the sales returns reserve.
The Company’s customers may return purchased items for a refund. The Company provides an allowance for sales returns, net
of cost of goods sold, based on historical return rates.