SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of A&F and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

FISCAL YEAR

The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to “Fiscal 2014” represent the 52-week fiscal year ended January 31, 2015; to “Fiscal 2013” represent the 52-week fiscal year ended February 1, 2014; and to “Fiscal 2012” represent the 53-week fiscal year ended February 2, 2013. In addition, all references herein to “Fiscal 2015” represent the 52-week fiscal year that will end on January 30, 2016.

REVISIONS AND RECLASSIFICATIONS

The fifty-two week periods ended January 31, 2015 and February 1, 2014 included the correction of certain immaterial errors relating to prior periods. The out-of-period correction of errors resulted in a reduction to income before taxes of $2.9 million, or $1.8 million after tax, and an unrelated tax charge of $0.4 million, for a combined reduction to net income of $2.2 million for the fifty-two week period ended January 31, 2015. The out-of-period correction of errors resulted in an increase to income before taxes of $2.6 million, or $0.8 million after tax, and an unrelated tax charge of $0.9 million, for a combined reduction to net income of $0.1 million for the fifty-two week period ended February 1, 2014. In addition, amounts recorded out-of-period included a reduction to net cash provided by operating activities of $11.8 million for the fifty-two week period ended January 31, 2015. The Company does not believe these corrections were material to any current or prior interim or annual periods that were affected.

USE OF ESTIMATES

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ.

CASH AND EQUIVALENTS

Cash and equivalents include amounts on deposit with financial institutions, United States treasury bills, and other investments, primarily held in money market accounts, with original maturities of less than three months.

RESTRICTED CASH

Any cash that is legally restricted from use is recorded in Other Assets on the Consolidated Balance Sheets. The restricted cash balance was $14.8 million and $26.7 million on January 31, 2015 and February 1, 2014, respectively. Restricted cash includes various cash deposits with international banks that are used as collateral for customary non-debt banking commitments and deposits into trust accounts to conform to standard insurance security requirements.

RABBI TRUST ASSETS

See Note 4, “RABBI TRUST ASSETS.”

RECEIVABLES

Receivables primarily include credit card receivables, construction allowances, value added tax (“VAT”) receivables and other tax credits or refunds.

As part of the normal course of business, the Company has approximately three to four days of proceeds from sales transactions outstanding with its third-party credit card vendors at any point. The Company classifies these outstanding balances as credit card receivables. Construction allowances are recorded for certain store lease agreements for improvements completed by the Company. VAT receivables are payments the Company has made on purchases of goods that will be recovered as those goods are sold.

INVENTORIES

Inventories are principally valued at the lower of cost or market on a weighted-average cost basis. The Company writes down inventory through a lower of cost or market adjustment, the impact of which is reflected in Cost of Goods Sold in the Consolidated Statements of Operations and Comprehensive (Loss) Income. This adjustment is based on management's judgment regarding future demand and market conditions and analysis of historical experience. The lower of cost or market reserve for inventory was $12.7 million and $22.1 million as of January 31, 2015 and February 1, 2014, respectively.

Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each period that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink reserve accordingly. The shrink reserve was $11.4 million and $13.6 million at January 31, 2015 and February 1, 2014, respectively.

The inventory balance, net of reserves, was $460.8 million and $530.2 million at January 31, 2015 and February 1, 2014, respectively. These balances included inventory in transit from vendors of $56.1 million and $76.4 million at January 31, 2015 and February 1, 2014, respectively. Inventory in transit is considered to be merchandise owned by the Company that has not yet been received at a Company distribution center.

OTHER CURRENT ASSETS

Other current assets include prepaid rent, current store supplies, derivative contracts and other prepaids.

PROPERTY AND EQUIPMENT

Depreciation and amortization of property and equipment are computed for financial reporting purposes on a straight-line basis using the following service lives:



Category of Property and Equipment		Service Lives
Information technology		3 - 7 years
Furnitures, fixtures and equipment		3 - 15 years
Leasehold improvements		3 - 15 years
Other property and equipment		3 - 20 years
Buildings		30 years

Leasehold improvements are amortized over either their respective lease terms or their service lives, whichever is shorter. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are charged to expense as incurred. Major remodels and improvements that extend the service lives of the related assets are capitalized.

Long-lived assets, primarily comprising of property and equipment, are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset may not be recoverable. On at least a quarterly basis, the Company reviews for indicators of impairment. In addition, the Company conducts an annual impairment analysis in the fourth quarter of each year. For purposes of the annual review, the Company reviews long-lived assets associated with stores that have an operating loss in the current year or otherwise display an indicator of impairment. The Company tests long-lived assets for impairments in the quarter in which a triggering event occurs. See Note 17, "SEGMENT REPORTING," for additional information about how store operating income or loss is determined.

The reviews are conducted at the individual store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

The impairment evaluation is performed as a two-step test. First, the Company utilizes an undiscounted future cash flow model to test the individual asset groups for recoverability. If the net carrying value of the asset group exceeds the undiscounted cash flows, the Company proceeds to step two. Under step two, an impairment loss is recognized for the excess of net book value over the fair value of the assets. Factors used in the evaluation include, but are not limited to, management’s plans for future operations, recent operating results and projected cash flows. See Note 6, “PROPERTY AND EQUIPMENT, NET,” for further discussion.

The Company expenses all internal-use software costs incurred in the preliminary project stage and capitalizes certain direct costs associated with the development and purchase of internal-use software within property and equipment. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software, generally not exceeding seven years.

INCOME TAXES

Income taxes are calculated using the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using current enacted tax rates in effect for the years in which those temporary differences are expected to reverse. Inherent in the determination of the Company's income tax liability and related deferred income tax balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to the Company's operations. The Company is subject to audit by taxing authorities, usually several years after tax returns have been filed, and the taxing authorities may have differing interpretations of tax laws. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company records tax expense or benefit that does not relate to ordinary income in the current fiscal year discretely in the period in which it occurs. Examples of such types of discrete items include, but are not limited to: changes in estimates of the outcome of tax matters related to prior years, assessments of valuation allowances, return-to-provision adjustments, tax-exempt income, and the settlement of tax audits and changes in tax legislation.

See Note 11, “INCOME TAXES,” for a discussion regarding the Company’s policies for uncertain tax positions.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The functional currency of the Company’s foreign subsidiaries is generally the local currencies in which they operate. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Equity accounts denominated in foreign currencies are translated into U.S. Dollars at historical exchange rates. Revenues and expenses denominated in foreign currencies are translated into U.S. Dollars at the monthly average exchange rate for the period. Gains and losses resulting from foreign currency transactions are included in the results of operations; whereas, translation adjustments and inter-company loans of a long-term investment nature are reported as an element of Other Comprehensive (Loss) Income. Foreign currency transactions resulted in a loss of $2.0 million for Fiscal 2014 and a gain of $2.9 million and $3.3 million for Fiscal 2013 and Fiscal 2012, respectively.

DERIVATIVES

See Note 13, “DERIVATIVES.”

CONTINGENCIES

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, and the Company establishes reserves for the outcome of litigation where it deems appropriate to do so under applicable accounting rules. The Company’s assessment of the current exposure could change in the event of the discovery of additional facts with respect to legal matters pending against the Company or determinations by judges, juries, administrative agencies or other finders of fact that are not in accordance with the Company’s evaluation of claims. Actual liabilities may exceed the amounts reserved, and there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company has established accruals for certain matters where losses are deemed probable and reasonably estimable. There are other claims and legal proceedings pending against the Company for which accruals have not been established.

STOCKHOLDERS’ EQUITY

At January 31, 2015 and February 1, 2014, there were 150.0 million shares of A&F’s Class A Common Stock, $0.01 par value, authorized, of which 69.4 million and 76.4 million were outstanding at January 31, 2015 and February 1, 2014, respectively, and 106.4 million shares of Class B Common Stock, $0.01 par value, authorized, none of which were outstanding at January 31, 2015 and February 1, 2014.

Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to three votes per share on all matters submitted to a vote of stockholders.

REVENUE RECOGNITION

The Company recognizes store sales at the time the customer takes possession of the merchandise. Direct-to-consumer sales are recorded based on an estimated date for customer receipt of merchandise, which is based on shipping terms and historical delivery transit times. Amounts relating to shipping and handling billed to customers in a sale transaction are classified as Net Sales and the related direct shipping and handling costs are classified as Stores and Distribution Expense in the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income. Sales are recorded net of an allowance for estimated returns, associate discounts, and promotions and other similar customer incentives. The Company estimates reserves for sales returns based on historical experience. The sales return reserve was $9.5 million, $8.0 million and $9.3 million at January 31, 2015, February 1, 2014 and February 2, 2013, respectively.

The Company sells gift cards in its stores and through direct-to-consumer operations. The Company accounts for gift cards sold to customers by recognizing a liability at the time of sale. Gift cards sold to customers do not expire or lose value over periods of inactivity. The liability remains on the Company’s books until the Company recognizes income from gift cards. Income from gift cards is recognized at the earlier of redemption by the customer (recognized as Net Sales) or when the Company determines that the likelihood of redemption is remote, referred to as gift card breakage (recognized as Other Operating Income). The Company determines the probability of the gift card being redeemed to be remote based on historical redemption patterns. The gift card liability was $36.9 million and $42.5 million at January 31, 2015 and February 1, 2014, respectively.

The Company is not required by law to escheat the value of unredeemed gift cards to the states in which it operates. The Company recognized in Other Operating Income gift card breakage of $5.8 million, $8.8 million and $6.9 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively.

The Company does not include tax amounts collected as part of the sales transaction in its net sales results.

COST OF GOODS SOLD

Cost of goods sold primarily comprises cost incurred to ready inventory for sale, including product costs, freight, and import cost, as well as provision for reserves for shrink and lower of cost or market. Gains and losses associated with foreign currency exchange contracts related to hedging of inventory purchases are also recognized in cost of goods sold when the inventory being hedged is sold.

STORES AND DISTRIBUTION EXPENSE

Stores and distribution expense includes store payroll, store management, rent, utilities and other landlord expenses, depreciation and amortization, repairs and maintenance and other store support functions, as well as Direct-to-Consumer expense and Distribution Center (“DC”) expense.

Shipping and handling costs, including costs incurred to store, move and prepare merchandise for shipment, and costs incurred to physically move merchandise to customers, associated with direct-to-consumer operations were $108.1 million, $93.4 million and $78.6 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively. Handling costs, including costs incurred to store, move and prepare merchandise for shipment to stores were $52.2 million, $53.9 million and $59.4 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively. These amounts are recorded in Stores and Distribution Expense in the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income. Costs incurred to physically move merchandise to stores is recorded in Cost of Goods Sold in the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income.

MARKETING, GENERAL & ADMINISTRATIVE EXPENSE

Marketing, general and administrative expense includes: photography and social media; store marketing; home office compensation, except for those departments included in stores and distribution expense; information technology; outside services such as legal and consulting; relocation; recruiting; samples and travel expenses.

RESTRUCTURING CHARGES

Restructuring charges consist of exit costs and other costs associated with the reorganization of the Company's operations, including employee termination costs, lease contract termination costs, impairment of assets, and any other qualifying exit costs. Costs associated with exit or disposal activities are recorded when the liability is incurred or when such costs are deemed probable and estimable and represent the Company's best estimates.

OTHER OPERATING INCOME, NET

Other operating income, net included income of $10.2 million, $9.0 million and $4.8 million related to insurance recoveries for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively; $5.8 million, $8.8 million and $6.9 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively, related to gift card balances whose likelihood of redemption has been determined remote and a loss of $2.0 million in Fiscal 2014, and gains of $2.9 million and $3.3 million in Fiscal 2013 and Fiscal 2012, respectively, attributed to foreign currency transactions. Other operating income, net for Fiscal 2012 also included a gain of $2.5 million related to the net impact of changes in valuation related to other-than-temporary impairments associated with auction rate securities ("ARS").

WEBSITE AND ADVERTISING COSTS

Advertising costs are comprised of in-store photography, e-mail distribution and other digital direct advertising, and other media advertising. Beginning in Fiscal 2014, costs associated with cross-channel brand engagement campaigns and marketing events have been classified as advertising costs. Accordingly, the advertising expense disclosures for Fiscal 2013 and Fiscal 2012 have been revised to reflect this change. The production of in-store photography and signage are expensed when the marketing campaign commences as a component of Marketing, General and Administrative Expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income. Website and other advertising costs related specifically to direct-to-consumer operations are expensed as incurred as a component of Stores and Distribution Expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income. All other advertising costs are expensed as incurred as a component of Marketing, General and Administrative Expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The Company recognized $84.6 million, $68.1 million and $59.0 million in advertising expense in Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively.

LEASED FACILITIES

The Company leases property for its stores under operating leases. Lease agreements may contain construction allowances, rent escalation clauses and/or contingent rent provisions.

Annual store rent is comprised of a fixed minimum amount and/or contingent rent based on a percentage of sales. For construction allowances, the Company records a deferred lease credit on the Consolidated Balance Sheets and amortizes the deferred lease credit as a reduction of rent expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income over the term of the lease. For scheduled rent escalation clauses during the lease term, the Company records minimum rental expense on a straight-line basis over the term of the lease on the Consolidated Statements of Operations and Comprehensive (Loss) Income. The difference between rent expense and the amounts paid under the lease, less amounts attributable to the repayment of construction allowances recorded as deferred rent, is included in Accrued Expenses and Other Liabilities on the Consolidated Balance Sheets. The term over which the Company amortizes construction allowances and minimum rental expenses on a straight-line basis begins on the date of initial possession, which is generally when the Company enters the space and begins construction.

Certain leases provide for contingent rents, which are determined as a percentage of gross sales. The Company records a contingent rent liability in Accrued Expenses on the Consolidated Balance Sheets, and the corresponding rent expense on the Consolidated Statements of Operations and Comprehensive (Loss) Income on a ratable basis over the measurement period when it is determined that achieving the specified levels during the fiscal year is probable. In addition, most leases require payment of real estate taxes, insurance and certain common area maintenance costs in addition to future minimum lease payments.

A summary of rent expense follows (in thousands):



	2014			2013			2012
Store rent:
Fixed minimum⁽¹⁾	$	432,794		$	464,937		$	414,061
Contingent	8,886			8,624			16,828
Deferred lease credits amortization	(38,437		)	(45,899		)	(45,926		)
Total store rent expense	403,243			427,662			384,963
Buildings, equipment and other	4,619			4,987			6,259
Total rent expense	$	407,862		$	432,649		$	391,222

⁽¹⁾Includes lease termination fees of $12.4 million, $39.2 million and $3.4 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively. For Fiscal 2014 and Fiscal 2013, lease termination fees of $6.8 million and $39.1 million, respectively, related to the Gilly Hicks restructuring.

At January 31, 2015, the Company was committed to non-cancelable leases with remaining terms of one to 16 years. Excluded from the obligations below are portions of lease terms that are currently cancelable at the Company's discretion without condition. While included in the obligations below, in many instances the Company has options to terminate certain leases if stated sales volume levels are not met or the Company ceases operations in a given country, which may be subject to lease termination policies. A summary of operating lease commitments, including leasehold financing obligations, under non-cancelable leases follows (in thousands):



Fiscal 2015	$	409,046
Fiscal 2016	$	366,909
Fiscal 2017	$	279,960
Fiscal 2018	$	210,674
Fiscal 2019	$	165,307
Thereafter	$	525,286

LEASEHOLD FINANCING OBLIGATIONS

In certain lease arrangements, the Company is involved in, or is deemed to be involved in, the construction or modification of the building. If it is determined that the Company has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project, the Company records an asset for the amount of the total project costs, including the portion funded by the landlord, and an amount related to the value attributed to the pre-existing leased building in Property and Equipment, Net, and a corresponding financing obligation in Leasehold Financing Obligations, on the Consolidated Balance Sheets. Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, the Company continues to amortize the obligation over the lease term and depreciates the asset over its useful life. The Company allocates a portion of its rent obligation to the assets which are owned for accounting purposes as a reduction of the financing obligation and interest expense. As of January 31, 2015 and February 1, 2014, the Company had $50.5 million and $60.7 million, respectively, of long-term liabilities related to leasehold financing obligations. Total interest expense related to landlord financing obligations was $6.2 million, $6.6 million and $6.8 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively.

STORE PRE-OPENING EXPENSES

Pre-opening expenses related to new store openings are expensed as incurred and are reflected as a component of "Stores and Distribution Expense."

DESIGN AND DEVELOPMENT COSTS

Costs to design and develop the Company’s merchandise are expensed as incurred and are reflected as a component of “Marketing, General and Administrative Expense.”

NET INCOME PER SHARE

Net income per basic and diluted share is computed based on the weighted-average number of outstanding shares of Class A Common Stock (“Common Stock”).

Weighted-Average Shares Outstanding and Anti-Dilutive Shares (in thousands):



	2014		2013		2012
Shares of Common Stock issued	103,300		103,300		103,300
Treasury shares	(31,515	)	(26,143	)	(21,360	)
Weighted-Average — Basic shares	71,785		77,157		81,940
Dilutive effect of share-based compensation awards	1,152		1,509		1,235
Weighted-Average — Diluted shares	72,937		78,666		83,175
Anti-dilutive shares ⁽¹⁾	6,144		4,630		5,228


⁽¹⁾	Reflects the number of shares subject to outstanding share-based compensation awards but excluded from the computation of net income per diluted share because the impact would be anti-dilutive.

SHARE-BASED COMPENSATION

See Note 3, “SHARE-BASED COMPENSATION.”

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the Financial Accounting Standards Board ("FASB") issued Account Standards Update ("ASU") No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which amends Accounting Standards Codification ("ASC") 740, "Income Taxes." The amendments provide guidance on the financial statement presentation of an unrecognized tax benefit as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists. The amendments were effective at the beginning of Fiscal 2014. The adoption of this guidance did not have an impact on the Company's consolidated financial statements.

In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)." The new ASC guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. This guidance is effective for the Company beginning Fiscal 2017, and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the potential impact of this standard.

In June 2014, FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period," which amends ASC 718, "Compensation—Stock Compensation." The amendment provides guidance on the treatment of share-based payments awards with a specific performance target, requiring that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. This guidance is effective for the Company at the beginning of Fiscal 2016 with early adoption permitted. The adoption of this amendment is not expected to have a material impact on the Company's consolidated financial statements.

In February 2015, FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." These amendments provide guidance which change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance is effective for the Company at the beginning of Fiscal 2017 with early adoption permitted. The adoption of this amendment is not expected to have a material impact on the Company's consolidated financial statements.