Summary of Significant Accounting Policies

9 Months Ended

Nov. 02, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Significant Accounting Policies [Text Block]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying Condensed Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its financial position, results of operations and cash flows.

The Company has interests in an Emirati business venture and in a Kuwaiti business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with MAF’s portion of net income presented as net income attributable to noncontrolling interests (“NCI”) on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and MAF’s portion of equity presented as NCI on the Condensed Consolidated Balance Sheets.

Fiscal year

The Company’s fiscal year ends on the Saturday closest to January 31. This typically results in a fifty-two week year, but occasionally gives rise to an additional week, resulting in a fifty-three week year. Fiscal years are designated in the consolidated financial statements and notes, as well as the remainder of this Quarterly Report on Form 10-Q, by the calendar year in which the fiscal year commenced. All references herein to the Company’s fiscal years are as follows:



Fiscal year	Fiscal year ended	Number of weeks
Fiscal 2018	February 2, 2019	52
Fiscal 2019	February 1, 2020	52

Interim financial statements

The Condensed Consolidated Financial Statements as of November 2, 2019, and for the thirteen and thirty-nine week periods ended November 2, 2019 and November 3, 2018, are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, the Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in A&F’s Annual Report on Form 10-K for Fiscal 2018 filed with the SEC on April 1, 2019. The February 2, 2019 consolidated balance sheet data, included herein, were derived from audited consolidated financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments (which are of a normal recurring nature) necessary to state fairly, in all material respects, the financial position, results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for Fiscal 2019.

Certain prior year amounts have been reclassified for consistency with the current year presentation of flagship store exit charges on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Recent accounting pronouncements

The Company reviews recent accounting pronouncements on a quarterly basis and has excluded discussion of those not applicable to the Company and those not expected to have a material impact on the Company’s consolidated financial statements. The following table provides a brief description of certain recent accounting pronouncements the Company has adopted.



Accounting Standards Update (ASU)	Description	Effect on the financial statements or other significant matters
Leases (ASU 2016-02) Date of adoption: February 3, 2019	This update supersedes the leasing standard in Accounting Standards Codification (“ASC”) 840, Leases. The new standard requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key leasing information that depicts the lease rights and obligations of an entity.	The Company adopted this standard using a modified retrospective transition method and elected to not restate comparative periods. In conjunction with the adoption of this standard, the Company elected: - the package of practical expedients which, among other things, allowed the Company to carry forward historical lease classification for leases existing before the date of adoption; and - to combine lease and nonlease components for all current classes of underlying leased assets. However, the Company did not elect the practical expedient to use hindsight when determining the lease term or assessing impairment. Adoption of this standard resulted in the Company’s total assets and total liabilities on the Condensed Consolidated Balance Sheet each increasing by approximately $1.2 billion, primarily due to the recognition of operating lease right-of-use assets and liabilities. The Company also recognized a cumulative adjustment decreasing the opening balance of retained earnings by $0.1 billion on the date of adoption. The adoption of this standard did not have a significant impact on the timing or classification of the Company’s Consolidated Statement of Cash Flows, the Company’s liquidity or the Company’s debt covenant compliance under current agreements. Additional information regarding the impact from adoption of the new lease accounting standard and updated accounting policies related to leases are provided further in this Note 2.
Derivatives and Hedging — Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12) Date of adoption: February 3, 2019	This update amends ASC 815, Derivatives and Hedging. The new standard simplifies certain aspects of hedge accounting for both financial and commodity risks to more accurately present the economic effects of an entity’s risk management activities in its financial statements.	The Company adopted this standard using a modified retrospective transition approach, while the amended presentation and disclosure standard requires a prospective approach. Upon adoption of this standard, the Company elected to include time value in its assessment of effectiveness for derivative instruments designated as cash flow hedges. Updated accounting policies related to derivatives have been updated and are provided further in this Note 2. The adoption of this standard did not have a significant impact on the Company’s Condensed Consolidated Financial Statements for the thirteen and thirty-nine weeks ended November 2, 2019, and is not expected to have a significant impact on the Company’s consolidated financial statements for Fiscal 2019.
Intangibles — Goodwill and Other —Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15) Date of adoption: February 3, 2019	This update amends ASC 350, Intangibles — Goodwill and Other —Internal-Use Software. The new standard allows companies to defer certain direct costs related to software as a service (“SaaS”) implementation costs and amortize them to operating expense over the term of the related SaaS arrangement. The criteria for determining whether costs associated with SaaS can be capitalized are now the same criteria applied to internal software development costs in order to assess eligibility for deferral.	The Company early adopted this standard on a prospective basis and comparative periods have not been restated. The Company expects to capitalize up to $5.0 million of SaaS implementation costs in Fiscal 2019, of which $3.0 million has been capitalized in the thirty-nine weeks ended November 2, 2019. Amortization expense related to capitalized SaaS implementation costs was $0.5 million and $0.7 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively.

The following table provides the impact from adoption of the new lease accounting standard on the Company’s Condensed Consolidated Balance Sheet:



(in thousands)	February 2, 2019 (as reported under previous lease accounting standard)			Impact from adoption of new lease accounting standard			Upon adoption on February 3, 2019 (under new lease accounting standard) ⁽¹⁾
Assets
Current assets:
Cash and equivalents	$	723,135		$	—		$	723,135
Receivables	73,112			—			73,112
Inventories	437,879			—			437,879
Other current assets ⁽²⁾	101,824			(31,310		)	70,514
Total current assets	1,335,950			(31,310		)	1,304,640
Property and equipment, net ⁽³⁾	694,855			(46,624		)	648,231
Operating lease right-of-use assets ⁽²⁾	—			1,234,515			1,234,515
Other assets^{(2) (5)}	354,788			15,553			370,341
Total assets	$	2,385,593		$	1,172,134		$	3,557,727
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	226,878		$	—		$	226,878
Accrued expenses ⁽²⁾	293,579			(13,508		)	280,071
Short-term portion of operating lease liabilities⁽⁴⁾	—			280,108			280,108
Short-term portion of deferred lease credits ⁽²⁾	19,558			(19,558		)	—
Income taxes payable	18,902			—			18,902
Total current liabilities	558,917			247,042			805,959
Long-term liabilities:
Long-term portion of operating lease liabilities ⁽⁴⁾	—			1,193,946			1,193,946
Long-term portion of borrowings, net	250,439			—			250,439
Long-term portion of deferred lease credits ⁽²⁾	76,134			(76,134		)	—
Leasehold financing obligations⁽³⁾	46,337			(46,337		)	—
Other liabilities ^{(2) (5)}	235,145			(71,218		)	163,927
Total long-term liabilities	608,055			1,000,257			1,608,312
Stockholders’ equity
Class A Common Stock	1,033			—			1,033
Paid-in capital	405,379			—			405,379
Retained earnings⁽⁶⁾	2,418,544			(75,165		)	2,343,379
Accumulated other comprehensive loss, net of tax	(102,452		)	—			(102,452		)
Treasury stock, at average cost	(1,513,604		)	—			(1,513,604		)
Total Abercrombie & Fitch Co. stockholders’ equity	1,208,900			(75,165		)	1,133,735
Noncontrolling interests	9,721			—			9,721
Total stockholders’ equity	1,218,621			(75,165		)	1,143,456
Total liabilities and stockholders’ equity	$	2,385,593		$	1,172,134		$	3,557,727


⁽¹⁾	Amounts under “Upon adoption on February 3, 2019 (under new lease accounting standard),” are calculated as February 2, 2019 reported balances adjusted for the impact of adoption on the first day of Fiscal 2019, February 3, 2019.

⁽²⁾

Upon adoption, the Company recognized assets for the rights to use its operating leases on the Condensed Consolidated Balance Sheet. In conjunction with this recognition, the Company reclassified amounts to operating lease right-of-use assets including: short-term prepaid rent from other current assets; key money, long-term prepaid rent and leasehold acquisition costs from other assets; short-term and long-term portions of deferred lease credits; accrued rent and accrued straight-line rent from accrued expenses and other liabilities, respectively.

⁽³⁾

Upon adoption, the Company derecognized construction project assets and related leasehold financing obligations that previously failed to qualify for sale and leaseback accounting. In certain instances, these construction project assets had shielded other assets included within their respective asset groups from impairment, as the fair value of the construction project assets had exceeded the carrying values of their respective asset groups. In such instances, the Company recognized impairment of certain leasehold improvements and store assets upon adoption.


⁽⁴⁾	Upon adoption, the Company recognized operating lease liabilities on the Condensed Consolidated Balance Sheet.


⁽⁵⁾	Upon adoption, the Company established net deferred tax assets for operating lease right-of-use assets and operating lease liabilities.

⁽⁶⁾

Upon adoption, the Company recognized a cumulative adjustment decreasing the opening balance of retained earnings, primarily related to right-of-use asset impairment charges for certain of the Company’s stores where it was previously determined that the carrying value of assets was not recoverable, partially offset by benefits to retained earnings to establish net deferred tax assets and a net gain resulting from the derecognition of certain leased building assets and related leasehold financing obligations that previously failed to qualify for sale and leaseback accounting.

The Company’s significant accounting policies as of November 2, 2019 have not changed materially from those disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of A&F’s Annual Report on Form 10-K for Fiscal 2018, with the exception of those discussed below which have been updated to reflect new accounting standards adopted in Fiscal 2019.

Leases

The Company determines if an arrangement is a lease at inception. On the lease commencement date, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.

As the rates implicit in the Company's leases are not readily determinable, the Company uses its incremental borrowing rate based on the transactional currency of the lease and the lease term for the initial measurement of the lease right-of-use asset and liability. For leases existing before the adoption of the new lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of the new lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date.

The Company has elected to combine lease and nonlease components for all current classes of underlying leased assets.

The measurement of lease right-of-use assets and liabilities includes amounts related to:


•	Lease payments made prior to the lease commencement date;


•	Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and tenant improvement costs, which are presented as a reduction to the right-of-use asset recorded;


•	Fixed payments related to lease components, such as rent escalation payments scheduled at the lease commencement date;


•	Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs; and


•	Unamortized initial direct costs incurred in conjunction with securing a lease, including key money, which are amounts paid directly to a landlord in exchange for securing the lease, and leasehold acquisition costs, which are amounts paid to parties other than the landlord, such as an existing tenant, to secure the desired lease.

The measurement of lease right-of-use assets and liabilities excludes amounts related to:


•	Costs expected to be incurred to return a leased asset to its original condition, also referred to as asset retirement obligations, which are classified within other liabilities on the Condensed Consolidated Balance Sheets;


•	Variable payments related to lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in the period incurred on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss);


•	Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss); and


•	Leases not related to Company-operated retail stores with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Certain of the Company’s leases include options to extend the lease or to terminate the lease. The Company assesses these leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s lease right-of-use assets and liabilities. Generally, the Company’s options to extend its leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) until a new agreement has been executed.

Amortization and interest expense related to lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired lease right-of-use assets are calculated on a front-loaded pattern. Depending on the nature of the lease, amortization and interest expense is recorded within stores and distribution expense, marketing, general and administrative expense, or flagship store exit charges on the Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company’s lease right-of-use assets are assessed for indicators of impairment at least quarterly, in accordance with the long-lived asset impairment policy disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Property and equipment, net,” of the Notes to Consolidated Financial Statements contained in “ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,” of A&F’s Annual Report on Form 10-K for Fiscal 2018.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any sublease arrangements with any related party or third party.

Refer to Note 7, “LEASES.”

Derivative instruments

The Company is exposed to risks associated with changes in foreign currency exchange rates and uses derivative instruments, primarily forward contracts, to manage the financial impacts of these exposures. The Company does not use forward contracts to engage in currency speculation and does not enter into derivative financial instruments for trading purposes.

In order to qualify for hedge accounting treatment, a derivative instrument must be considered highly effective at offsetting changes in either the hedged item’s cash flows or fair value. Additionally, the hedge relationship must be documented to include the risk management objective and strategy, the hedging instrument, the hedged item, the risk exposure, and how hedge effectiveness will be assessed prospectively and retrospectively. The extent to which a hedging instrument has been, and is expected to continue to be, effective at offsetting changes in fair value or cash flows is assessed and documented at least quarterly. If the underlying hedged item is no longer probable of occurring, hedge accounting is discontinued.

For derivative instruments that either do not qualify for hedge accounting or are not designated as hedges, all changes in the fair value of the derivative instrument are recognized in earnings. For qualifying cash flow hedges, the change in the fair value of the derivative instrument is recorded as a component of other comprehensive income (loss) (“OCI”) and recognized in earnings when the hedged cash flows affect earnings. If the cash flow hedge relationship is terminated, the derivative instrument gains or losses that are deferred in OCI will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, or a two-month period thereafter, the derivative instrument gains or losses are immediately recognized in earnings.

The Company uses derivative instruments, primarily forward contracts designated as cash flow hedges, to hedge the foreign currency exchange rate exposure associated with forecasted foreign-currency-denominated intercompany inventory transactions with foreign subsidiaries before inventory is sold to third parties. Fluctuations in exchange rates will either increase or decrease the Company’s intercompany equivalent cash flows and affect the Company’s U.S. Dollar earnings. Gains or losses on the foreign currency exchange forward contracts that are used to hedge these exposures are expected to partially offset this variability. Foreign currency exchange forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed upon settlement date. These forward contracts typically have a maximum term of twelve months. The conversion of the inventory to cost of sales, exclusive of depreciation and amortization, will result in the reclassification of related derivative gains and losses that are reported in accumulated other comprehensive loss (“AOCL”) into earnings on the Condensed Consolidated Balance Sheets.

The Company also uses foreign currency exchange forward contracts to hedge certain foreign-currency-denominated net monetary assets and liabilities, such as cash balances, receivables and payables. Fluctuations in foreign currency exchange rates result in transaction gains and losses being recorded in earnings as monetary assets and liabilities are remeasured at the spot exchange rate at quarter-end or upon settlement. The Company has chosen not to apply hedge accounting to these foreign currency exchange forward contracts because there are no differences in the timing of gain or loss recognition on the hedging instruments and the hedged items.

The Company presents its derivative assets and derivative liabilities at their gross fair values within other current assets and accrued liabilities, respectively, on the Condensed Consolidated Balance Sheets. However, the Company’s derivative contracts allow net settlements under certain conditions.

Refer to Note 11, “DERIVATIVE INSTRUMENTS.”

Condensed Consolidated Statements of Cash Flows reconciliation

The following table provides a reconciliation of cash and equivalents and restricted cash and equivalents to the amounts shown on the Condensed Consolidated Statements of Cash Flows:



(in thousands)	Location	November 2, 2019		February 2, 2019		November 3, 2018		February 3, 2018
Cash and equivalents	Cash and equivalents	$	410,775	$	723,135	$	520,523	$	675,558
Long-term restricted cash and equivalents	Other assets	18,698		22,694		21,860		22,397
Short-term restricted cash and equivalents	Other current assets	$	2,550	$	—	$	—	$	—
Cash and equivalents and restricted cash and equivalents		$	432,023	$	745,829	$	542,383	$	697,955

BASIS OF PRESENTATION

Interim financial statements