Sally Beauty Supply 2013 Annual Report Download - page 87

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Income Taxes
We record income tax provisions in our consolidated financial statements based on an estimation of
current income tax liabilities. The development of these provisions requires judgments about tax issues,
potential outcomes and timing. If we prevail in tax matters for which provisions have been established or
are required to settle matters in excess of established provisions, our effective tax rate for a particular
period could be significantly affected.
For the fiscal years ended September 30, 2013, 2012 and 2011, the effective income tax rates were 36.7%,
35.4% and 36.4%, respectively. The lower fiscal year 2012 annual effective tax rate, compared to our
average historical effective tax rate of approximately 37.0%, was primarily due to tax benefits
(approximately $10.3 million) resulting from a limited restructuring, for U.S. income tax purposes,
completed in the fiscal year 2012.
Deferred income taxes are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which temporary differences are estimated to be recovered or settled. We believe that it is more
likely than not that our results of operations in the future will generate sufficient taxable income to realize
our deferred tax assets, net of the valuation allowance currently recorded. We have recorded a valuation
allowance to account for uncertainties regarding the recoverability of certain deferred tax assets, primarily
foreign loss carryforwards. In the future, if we determine that certain deferred tax assets will not be
realizable, the related adjustments could significantly affect our effective tax rate at that time. The
estimated tax benefit of an uncertain tax position is recorded in our financial statements only after
determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if
any, from applicable taxing authorities.
Assessment of Long-Lived Assets and Intangible Assets for Impairment
Long-lived assets, such as property and equipment, including store equipment, and purchased 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 fully recoverable. The recoverability of long-lived
assets and intangible assets subject to amortization is assessed by comparing the net carrying amount of
each asset to its total estimated undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds the sum of its undiscounted future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair
value of the asset.
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a
business combination. Goodwill and intangible assets with indefinite lives are not amortized; rather, they
are reviewed for impairment at least annually, and whenever events or changes in circumstances indicate it
is more likely than not that the value of the asset may be impaired. When assessing goodwill and intangible
assets with indefinite lives for potential impairment, management compares the carrying amount of the
asset to its fair value. In addition, management considers whether there has been an impairment to the
value of the asset by evaluating if various factors (including current operating results, anticipated future
results and cash flows, and relevant market and economic conditions) indicate a possible impairment.
As permitted, the Company adopted the provisions of Accounting Standards Update (‘‘ASU’’) No. 2011-08
in connection with its goodwill impairment test during the second quarter of the fiscal year 2012. This
amendment allows an entity to first assess relevant qualitative factors in order to determine whether it is
necessary to perform the two-step quantitative goodwill impairment test otherwise required under ASC
Topic 350, Intangibles—Goodwill and Other (‘‘ASC 350’’). In effect, the amendment eliminates the need to
calculate the fair value of a reporting unit in connection with the goodwill impairment test unless the entity
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