Urban Outfitters 2011 Annual Report Download - page 33

In assessing potential impairment of our store related assets, we periodically evaluate historical
and forecasted operating results and cash flows on a store-by-store basis. Newly opened stores may
take time to generate positive operating and cash flow results. Factors such as store type (e.g., mall
versus free-standing), store location (e.g., urban area versus college campus or suburb), current
marketplace awareness of our brands, local customer demographic data and current fashion trends are
all considered in determining the time frame required for a store to achieve positive financial results,
which, in general, is assumed to be measurable within three years from the date a store location has
opened. If economic conditions are substantially different from our expectations, the carrying value of
certain of our long-lived assets may become impaired. For fiscal 2011, 2010 and 2009, write-downs of
long-lived assets were not material.
We have not historically encountered material early retirement charges related to our long-lived
assets. The cost of assets sold or retired and the related accumulated depreciation or amortization is
removed from the accounts with any resulting gain or loss included in net income. Maintenance and
repairs are charged to operating expense as incurred. Major renovations or improvements that extend
the service lives of our assets are capitalized over the extension period or life of the improvement,
whichever is less.
As of the date of this report, all of our stores are expected to generate positive annual cash flow
before allocation of corporate overhead.
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, 2011 and January 31, 2010 totaled $52.1 million and
$43.6 million, respectively, representing 2.9% and 2.7% 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 $2.6 million as of January 31, 2011 from $2.2 million as of
January 31, 2010. This increase is based on evidence of our ability to generate sufficient future taxable
income in certain foreign and state 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.
Our tax liability for uncertain tax positions contains uncertainties because we are required to
make assumptions and to apply judgement to estimate the exposures associated with our various filing
positions. Although we believe that the judgements and estimates discussed herein are reasonable,
actual results may differ, and we may be exposed to losses or gains that could be material.
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