Abercombie & Fitch Co, a specialty retailer is a company incorporated in Delaware in 1996. The Company operates stores and websites for selling different brands of knit and woven shirts including sportswear and other apparels. The Company’s fiscal year closes on the Saturday closest to January 31st every year. At the end of the fiscal year 2008, the Company operated 1,125 stores spread throughout United States and a few in Canada and United Kingdom. During the fiscal 2008, the Company purchased merchandise from 210 vendors situated across the world, with a majority of suppliers situated in Asia, and Central and South America. The Company has a well established information system with software applications capable of managing information on point-of-sale, inventory management, supply chain management and financial reporting.
In accordance with the Statement of Financial Accounting Standard (SFAS) No 131, the Company has identified its operating segments covering its brands of “Abercrombie & Fitch, abercombie, Hollister, RUEHL and Gilly Hicks.” However the Company aggregates all the operating segments and reports as one segment, since all the segments have similar economic characteristic and therefore meet the aggregation criteria under paragraph 17 of SFAS 131.
The Company reports that the equity-based compensation award entered into with the CEO of the Company as of December 2008 may have a serious impact on the cash flow position of the Company. The Company also reports that such an arrangement may have a dilutive effect on the outstanding common stock of the company.
The Company in its Form 10-K filed with SEC declares that it does not have any off-balance sheet arrangements or debt obligations. The consolidated accounts of the company have been prepared following the “Generally Accepted Accounting Principles” (GAAP). The accounts of Abercombie & Fitch and its subsidiaries have been consolidated for the presentation of the consolidated accounts for the fiscal 2008. The intercompany balances have been eliminated for the purposes of consolidating the accounts.
The revenue recognition takes place at that point where the customer takes possession of the items on sale. The inventories of the company are valued at average cost or market price whichever is lower and the Company uses retail method to value the inventory. The Company makes a periodical review of the long-lived assets for assessing the applicability of impairment.
As per the provision of Statement of Position 98-1 “Acceptance for the Costs of Compute Software Developed or Obtained for Internal Use” the internal software costs associated with the initial project stage are charged off to revenue. The Company capitalizes certain direct costs associated with the development and purchase of internal-use software under the head “property, plant and Equipment – Capitalized Costs”.
Depreciation is calculated and charged off on the ‘Straight Line’ basis. Income-taxes are calculated based on the provisions of SFAS No. 109 “Accounting for Income Taxes” which employs the asset and liability method. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense which is in accordance with the FASB Interpretation No. 48.
After the adoption by the company of FIN 48 as of February 4, 2007, there was an adjustment of $ 2.8 million relating to cumulative effect of unrecognized tax benefits. This amount was earlier reduced from the retained earnings of the Company. After the adoption of FIN 48 the Company reclassified this item as other long-term liabilities instead of current taxes payable.
The Company has classified the outstanding balances with the credit card companies amounting to three to four days sales as receivables. “Effective February 3, 2008 the Company adopted SFAS No. 157 for financial assets and liabilities and any other assets or liabilities measured at fair value on a recurring basis.” (Form10-K)
Marketable securities having a par value of $ 194.7 million as of January 31, 2009 and $ 530.5 million as of February 2, 2008 have been classified by the Company as ‘available for sale’ securities. This reporting is in accordance with the provisions of SFAS 115. For the fiscal 2008, the Company has recorded a pre-tax impairment of $ 28.2 million, relating to the available-for-sale Auction Rate Securities (ARS) which amount has been shown as loss for the period.
Based on an agreement with UBS AG, a Swiss Corporation, the Company received the right to purchase UBS ARS at par, commencing on November 13, 2008. The Company also received a right (Put Option) to dispose of these ARS at its sole discretion from June 30, 2010. Upon the agreement with UBS AG, the Company had decided not to hold the ARS until maturity. Therefore the impairment cannot anymore constitute a temporary one and the Company has transferred the amount of & 76.5 million representing the par value of these securities from available-for sale securities to trading securities.
The Company has used US Dollar being the local currency as the functional currency in majority of its international transactions. Assets and liabilities situated in foreign countries where values have been denominated in foreign currencies are translated in to US Dollars being the reporting currency. This is keeping in line with the provisions of SFAS No. 52 “Foreign Currency Translation”. The Company has used monthly average exchange rate for the period for translating the revenues and expenses denominated in foreign currencies to the domestic currency. Gains and losses resulting from foreign currency translations find a place in the results of operations, while the adjustments on account of translation are included in the item “comprehensive income” as provided for in SFAS No. 130 “Reporting Comprehensive Income”.
According to FASB Staff Position No, FAS 157-2 the implementation of SFAS No.157 “Fair Value Measurements” was delayed partially for one year (KPMG). This delay was applicable for a period of one year in respect of non-financial assets and liabilities which are disclosed at assumed fair values in the financial statements on a non-recurring basis. In accordance with this change in the applicability of SFAS 157, the Company became obligated to follow SFAS 157 effective February 1, 2009 in respect of its non-current assets and liabilities which have been recognized or disclosed at fair value on a non-recurring basis. This has made the company to adopt the old method of presenting the values of non-current assets and liabilities for the fiscal 2008. However the Company has stated that it is examining the impact of the provisions of SFAS 157-2 since the Company is obligated to follow SFAS 157 from February 1, 2009.
The Company has accounted for derivatives transactions in accordance with the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”. The Company has the practice of entering periodically into forward foreign currency exchange contract to manage the risk of exchange fluctuations on assets and liabilities denominated in foreign currencies. However the Company has refrained from applying any hedge accounting to record the transactions relating to such contracts. The Company has therefore opted for taking the changes in fair value of these contracts to income to be classified as “Other Income”. The Company reports that it is not involved in any forward contracts in the nature of speculation and the Company also does not enter into derivative financial contracts for trading therein and earn additional income through this source. The Company charges off pre-opening expenses incurred on opening new stores to income statement as operating expenses. None of these expenses are capitalized. Similarly the Company follows the practice of charging off the costs of developing new designs for apparels to revenue classifying them as “Marketing, General and Administrative Expense”.
Share-based compensation is accounted by the Company following the provisions of SFAS No. 123 (revised 2004) “Share-Based Payment” (SFAS 123 (R)). The provisions of the revised Standard requires the measuring of share-based compensation in respect of stock options and stock appreciation rights according to fair values on the dates at which the options are granted. The valuation is to be done using the Option-Pricing Model. The Company uses Black-Sholes option pricing model for estimating the fair value of stock options and stock appreciation rights.
The Company has entered into a syndicated unsecured credit arrangement which replaces the Credit Agreement of December 2004, and the new agreement was entered to augment the working capital needs of the Company and to meet the planned capital expenditures, acquisition and other such investments.
Work Cited
Form10-K. Abercombie & Fitch Co. 2008. Web.
KPMG. Implementing SFAS 157. 2008. Web.