Urban Outfitters 2010 Annual Report Download - page 31

Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves
estimating our actual current tax obligations together with assessing temporary differences resulting
from differing treatment of certain items for tax and accounting purposes, such as depreciation of
property and equipment and valuation of inventories. These temporary differences result in deferred
tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the
likelihood that our deferred tax assets will be recovered from future taxable income. Actual results
could differ from this assessment if adequate taxable income is not generated in future periods. Net
deferred tax assets as of January 31, 2010 and January 31, 2009 totaled $43.6 million and
$46.3 million, respectively, representing 2.7% and 3.5% of total assets, respectively. To the extent we
believe that recovery of an asset is at risk, we establish valuation allowances. To the extent we
establish valuation allowances or increase the allowances in a period, we include an expense within the
tax provision in the consolidated statement of income.
We increased valuation allowances to $2.2 million as of January 31, 2010 from $1.4 million as of
January 31, 2009. This increase is based on evidence of our ability to generate sufficient future taxable
income in certain state and foreign jurisdictions. In the future, if enough evidence of our ability to
generate sufficient future taxable income in these jurisdictions becomes apparent, we would be
required to reduce our valuation allowances, resulting in a reduction in income tax expense in the
consolidated statement of income. On a quarterly basis, management evaluates the likelihood that we
will realize the deferred tax assets and adjusts the valuation allowances, if appropriate.
Accounting for Contingencies
From time to time, we are named as a defendant in legal actions arising from our normal business
activities. We account for contingencies such as these in accordance with generally accepted
accounting principles in the United States. We are required to record an estimated loss contingency
when information available prior to issuance of our consolidated financial statements indicates that it
is probable that an asset has been impaired or a liability has been incurred at the date of the
consolidated financial statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies arising from contractual or legal proceedings requires management to use its best
judgment when estimating an accrual related to such contingencies. As additional information
becomes known, our accrual for a loss contingency could fluctuate, thereby creating variability in our
results of operations from period to period. Likewise, an actual loss arising from a loss contingency
which significantly exceeds the amount accrued in our consolidated financial statements could have a
material adverse impact on our operating results for the period in which such actual loss becomes
known.
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