Accounting for Income Taxes

9 Months Ended

Nov. 03, 2013

Accounting for Income Taxes [Abstract]

Accounting for Income Taxes

(3) Accounting for Income Taxes  

Income taxes are provided using the asset/liability method, in which deferred taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and tax basis of existing assets and liabilities.  Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary.  The Company generally records income tax expense during interim periods based on its best estimate of the full year's effective tax rate.  However, income tax expense relating to adjustments to the Company's liabilities for uncertainty in income tax positions for prior reporting periods are accounted for in the interim period in which it occurs.  Income tax expense relating to adjustments for current year uncertain tax positions are accounted for as a component of the adjusted annualized effective tax rate.

In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets.  The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.  Accounting guidance states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining whether a valuation allowance is not needed against deferred tax assets.  As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.

The Company recorded the valuation allowance on its $9.8 million net deferred tax assets during the third quarter due to losses from operations and forecasts of losses for the current year to the extent we expected to be in a cumulative loss position for the three year period ending February 2, 2014.  Based on this assessment, the Company could not support the realization of its net deferred tax assets in future periods, and the remaining net deferred tax assets were written off.  Management will continue to evaluate all of the positive and negative evidence in future quarters and will make a determination as to whether it is more likely than not that its net deferred tax assets will be realized in future periods.  The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from using its loss carryforwards or utilizing other deferred tax assets in the future.

The statute of limitations for the Company's federal income tax returns is open for fiscal 2011 through fiscal 2013.  The Company files in numerous state jurisdictions with varying statutes of limitation.  The Company's state returns are subject to examination by the taxing authority for fiscal 2010 through 2013 or fiscal 2011 through fiscal 2013, depending on each state's statute of limitations.