Restoration Hardware 2015 Annual Report Download - page 79

76
Net Income Per Share
Basic net income per share is computed as net income divided by the weighted-average number of common shares outstanding
for the period. Diluted net income per share is computed as net income divided by the weighted-average number of common shares
outstanding for the period plus common stock equivalents consisting of shares subject to stock-based awards with exercise prices less
than or equal to the average market price of the Company’s common stock for the period, to the extent their inclusion would be
dilutive. Potential dilutive securities are excluded from the computation of diluted net income per share if their effect is anti-dilutive.
Income Taxes
The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial
statements or tax returns. In estimating future tax consequences, the Company generally takes into account all expected future events
then known to it, other than changes in the tax law or rates which have not yet been enacted and which are not permitted to be
considered. Accordingly, the Company may record a valuation allowance to reduce its net deferred tax assets to the amount that is
more-likely-than-not to be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional
basis and is based upon management’s best estimate of the recoverability of the Company’s net deferred tax assets. Future taxable
income and ongoing prudent and feasible tax planning are considered in determining the amount of the valuation allowance, and the
amount of the allowance is subject to adjustment in the future. Specifically, in the event the Company were to determine that it is not
more-likely-than-not able to realize its net deferred tax assets in the future, an adjustment to the valuation allowance would decrease
income in the period such determination is made. This allowance does not alter the Company’s ability to utilize the underlying tax net
operating loss and credit carryforwards in the future, the utilization of which is limited to achieving future taxable income.
The accounting standard for uncertainty in income taxes prescribes a recognition threshold that a tax position is required to meet
before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition issues. Differences between tax positions taken in a tax return and
amounts recognized in the financial statements generally result in an increase in liability for income taxes payable or a reduction of an
income tax refund receivable, or a reduction in a deferred tax asset or an increase in a deferred tax liability, or both. The Company
recognizes interest and penalties related to unrecognized tax benefits in tax expense.
Comprehensive Income
Comprehensive income is comprised of net income and other gains and losses affecting equity that are excluded from net
income. The components of other comprehensive income consist of gains (losses) on foreign currency translation, net of tax, and net
unrealized holding gains (losses) on investments, net of tax.
Foreign Currency Translation
Local currencies are generally considered the functional currencies outside the United States of America. Assets and liabilities
denominated in non-U.S. currencies are translated at the rate of exchange prevailing on the date of the consolidated balance sheets and
revenues and expenses are translated at average rates of exchange for the period. The related translation gains (losses) are reflected in
the accumulated other comprehensive income section of the consolidated statements of stockholders’ equity. Foreign currency gains
(losses) resulting from foreign currency transactions are included in selling, general and administrative expenses on the consolidated
statements of income and are not material for all periods presented.
Recently Issued Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board issued their
converged accounting standard update on revenue recognition, Accounting Standards Update 2014-09—Revenue from Contracts with
Customers (Topic 606). This guidance outlines a single comprehensive model for companies to use in accounting for revenue arising
from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The
core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer
obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Under the new guidance,
transfer of control is no longer the same as transfer of risks and rewards as indicated in the prior guidance. The Company will also
need to apply the new guidance to determine whether revenue should be recognized over time or at a point in time. This guidance can
be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The FASB
deferred the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP for one year from the
original effective date. In accordance with the deferral, ASU 2014-09 will become effective beginning after December 15, 2017 for
public entities. Early application is permitted for annual reporting periods ending after December 15, 2016. The Company is
evaluating the impact of adopting this new accounting standard on its consolidated financial statements and has not selected an
adoption date or a transition method.