Note 2 - Significant Accounting Policies

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

2. SIGNIFICANT ACCOUNTING POLICIES

● Management estimates and reporting

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Assets and liabilities with reported amounts based on significant estimates include trade accounts receivable, inventory (slow-moving), and deferred income taxes.

● Principles of consolidation

Our consolidated financial statements include the accounts of Tandy Leather Factory, Inc. and its wholly owned subsidiaries, The Leather Factory, L.P. (a Texas limited partnership) and its corporate partners, Tandy Leather Company, L.P. (a Texas limited partnership) and its corporate partners, Mid-Continent Leather Sales, Inc. (an Oklahoma corporation), Roberts, Cushman & Company, Inc. (a Texas corporation), The Leather Factory of Canada, Ltd. (a Canadian corporation), Tandy Leather Factory UK Limited (a UK corporation), Tandy Leather Factory Australia Pty. Limited (an Australian corporation), and Tandy Leather Factory España, S.L. (a Spanish corporation). All intercompany accounts and transactions have been eliminated in consolidation.

● Foreign currency translation

Foreign currency translation adjustments arise from activities of our foreign subsidiaries. Results of operations are translated into U.S. dollars using the average exchange rates during the period, while assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments of assets and liabilities are recorded in stockholders’ equity. Gains and losses resulting from foreign currency transactions reported in the statements of income under the caption “Other (Income) Expense”, net, for all periods presented. We recognized foreign currency transaction gains of $41,000 and $26,000 in 2013 and 2012, respectively, and a foreign currency transaction loss of $200 in 2011.

● Revenue recognition

Our sales generally occur via two methods: (1) at the store counter, and (2) shipment by common carrier. Sales at the counter are recorded and title passes as transactions occur. Otherwise, sales are recorded and title passes when the merchandise is shipped to the customer. Shipping terms are normally FOB shipping point. Sales tax and comparable foreign tax is excluded from revenue.

We offer an unconditional satisfaction guarantee to all customers and accept all product returns. Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise.

● Discounts

We maintain four price levels on a consistent basis: retail, wholesale, business, and distributor. Gross sales are reported after deduction of discounts. We do not pay slotting fees or make other payments to resellers. Several customers require us to participate in their cooperative advertising programs. These programs are a negotiated percentage of their purchases and are accounted for as a reduction of sales.

● Expense categories

Cost of goods sold includes inbound freight and duty charges from vendors to our central warehouse, freight and handling charges to move merchandise from our central warehouse to our stores, and manufacturing overhead, as appropriate.

Operating expenses include all selling, general and administrative costs including wages and related employee expenses (payroll taxes, health benefits, savings plans, etc.), advertising, outbound freight charges (to ship merchandise to customers), rent, and utilities.

● Property and equipment, net of accumulated depreciation and amortization

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are five to ten years for equipment and machinery, seven to fifteen years for furniture and fixtures, five years for vehicles, and forty years for buildings and related improvements. Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.

● Inventory

Inventory is valued at the lower of first-in, first-out cost or market. In addition, the value of inventory is periodically reduced to net realizable value for slow-moving or obsolete inventory based on management's review of items on hand compared to their estimated future demand.

● Impairment of long-lived assets

Potential impairments of long-lived assets are reviewed annually or when events and circumstances warrant an earlier review. Impairment is determined when estimated future undiscounted cash flows associated with an asset are less than the asset’s carrying value.

● Earnings per share

Basic earnings per share are computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share includes, to the extent inclusion of such shares would be dilutive to earnings per share, the effect of outstanding options and warrants, computed using the treasury stock method.

BASIC	2013		2012		2011
Net income	$	7,265,717	$	5,596,070	$	4,752,601
Weighted average common shares outstanding		10,176,492		10,157,395		10,156,442
Earnings per share – basic	$	0.71	$	0.55	$	0.47
DILUTED
Net income	$	7,265,717	$	5,596,070	$	4,752,601
Weighted average common shares outstanding		10,176,492		10,157,395		10,156,442
Effect of assumed exercise of stock options and warrants		39,946		17,951		25,656
Weighted average common shares outstanding, assuming dilution		10,216,438		10,175,346		10,182,098
Earnings per share - diluted	$	0.71	$	0.55	$	0.47
Outstanding options and warrants excluded as anti-dilutive		-		-		25,000

For additional disclosures regarding the employee stock options and the warrants, see Note 11. The net effect of converting stock options and warrants to purchase 84,600, 125,600, and 90,600 shares of common stock at option prices less than the average market prices has been included in the computations of diluted EPS for the years ended December 31, 2013, 2012 and 2011, respectively.

● Goodwill and other intangibles

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is required to be evaluated for impairment on an annual basis, absent indicators of impairment during the interim. Application of the goodwill impairment test requires exercise of judgment, including the estimation of future cash flows, determination of appropriate discount rates and other important assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. Goodwill is not amortized, but is evaluated at least annually for impairment. We completed our annual goodwill impairment analysis as of December 31 in each of the three years ended December 31, 2013, and determined that no adjustment to the carrying value of goodwill was required.

A summary of changes in our goodwill for the years ended December 31, 2013 and 2012 is as follows:

	Leather Factory			Tandy Leather		Total
Balance, December 31, 2011	$	603,603		$	383,406	$	987,009
Acquisitions and adjustments		-			-		-
Foreign exchange gain/loss		3,716			-		3,716
Impairments		-			-		-
Balance, December 31, 2012	$	607,319		$	383,406	$	990,725
Acquisitions and adjustments		-			-		-
Foreign exchange gain/loss		(8,740	)		-		(8,740	)
Impairments		-			-		-
Balance, December 31, 2013	$	598,579		$	383,406	$	981,985

As of December 31, 2013 and 2012, our intangible assets and related accumulated amortization consisted of the following:

	As of December 31, 2013
	Gross		Accumulated Amortization		Net
Trademarks, Copyrights	$	544,369	$	487,891	$	56,478
Non-Compete Agreements		181,216		134,466		46,750
	$	725,585	$	622,357	$	103,228

	As of December 31, 2012
	Gross		Accumulated Amortization		Net
Trademarks, Copyrights	$	544,369	$	456,836	$	87,533
Non-Compete Agreements		183,216		125,216		58,000
	$	727,585	$	582,052	$	145,533

Excluding goodwill, we have no intangible assets not subject to amortization under U.S. GAAP. Amortization of intangible assets of $42,305 in 2013, $41,759 in 2012, and $44,933 in 2011 was recorded in operating expenses. The weighted average amortization period is 15 years for trademarks and copyrights. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding 5 years is as follows:

	Leather Factory		Tandy Leather		Total
2014	$	505	$	45,004	$	45,509
2015		-		40,302		40,302
2016		-		5,667		5,667
2017		-		1000		1,000
2018		-		750		750

● Fair value of financial Instruments

We measure fair value as an exit price, which is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering such assumptions, accounting standards establish a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 – observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – include other inputs that are directly or indirectly observable in the marketplace.

Level 3 – unobservable inputs which are supported by little or no market activity.

Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Our principal financial instruments held consist of certificates of deposit, accounts receivable, accounts payable, notes payable and long-term debt. The carrying value of accounts receivable and accounts payable approximate their fair value due to the relatively short-term nature of the accounts. The terms of the long-term debt are considered reasonable for this type of financing; therefore, the carrying amount approximates fair value.

● Income taxes

We account for income taxes using the asset and liability method. Under this method, the amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our assets and liabilities.

Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.

A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax position must meet a more-likely-than-not recognition threshold to be recognized.

We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available.

We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.

● Stock-based compensation

We have one stock option plan which permits annual stock option grants to non-employee directors with an exercise price equal to the fair market value of the shares at the date of grant. Under this plan, 12,000 options were awarded to directors in each of the years 2013, 2012 and 2011. These options vest and become exercisable six months from the option grant date. We had two other stock option plans from 1995 which provided for stock option grants to officers, key employees and non-employee directors. These plans expired in 2005. The expiration of the plans has no effect on the options previously granted. Options outstanding and exercisable were granted at a stock option price which was not less than the fair market value of our common stock on the date the option was granted and no option has a term in excess of ten years. We recognized share based compensation expense of $11,686, $10,000, and $33,000 for the years ended December 31, 2013, 2012 and 2011, respectively, as a component of operating expenses.

The stock option activity under our stock option plans was as follows:

	Weighted Average Exercise Price		# of shares			Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding, January 1, 2011	$	4.35		103,600
Granted		4.80		12,000
Cancelled		-		-
Exercised		-		-
Outstanding, December 31, 2011	$	4.40		115,600			5.15	$	206,332
Exercisable, December 31, 2011	$	4.40		115,600			5.15	$	206,332
Outstanding, January 1, 2012	$	4.40		115,600
Granted		5.27		12,000
Cancelled		-		-
Exercised		3.50		(6,000	)
Outstanding, December 31, 2012	$	4.53		121,600			4.83	$	206,760
Exercisable, December 31, 2012	$	4.53		121,600			4.83	$	206,760
Outstanding, January 1, 2013	$	4.53		121,600
Granted		6.87		12,000
Cancelled		-		-
Exercised		4.23		(49,000	)
Outstanding, December 31, 2013	$	5.04		84,600			7.22	$	104,656
Exercisable, December 31, 2013	$	5.04		84,600			7.22	$	104,656

Other information pertaining to option activity during the twelve month periods ended December 31, 2013, 2012 and 2011 are as follows:

	2013		2012		2011
Weighted average grant-date fair value of stock options granted	$	0.97	$	0.83	$	1.19
Total fair value of stock options vested	$	11,686	$	10,000	$	14,257
Total intrinsic value of stock options exercised	$	113,790	$	9,572	N/A

As of December 31, 2013, there was no unrecognized compensation cost related to non-vested stock options.

Cash received from the exercise of stock options for the years ended December 31, 2013 and 2012 was $113,800 and $20,980, respectively. No stock options were exercised in 2011.

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model (BSM) with the following weighted-average assumptions:

	2013			2012			2011
Volatility	19.1		%		21.4	%		33.8	%
Expected option life		3			3			3
Interest rate (risk free)		0.80	%		0.875	%		1.5	%
Dividends		None			None			None

The assumptions are evaluated and revised, as necessary, to reflect market conditions and our experience. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on our historical experience and future expectations.

We also have a restricted stock plan that was adopted by our Board of Directors in January 2013 and approved by our stockholders in June 2013. The plan reserves up to 300,000 shares of our common stock for restricted stock awards to our executive officers, non-employee directors and other key employees. Awards granted under the plan may be stock awards or performance awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years. No awards were made as of December 31, 2013.

● Comprehensive income

Comprehensive income includes net income and certain other items that are recorded directly to Stockholders’ Equity. The Company’s only source of other comprehensive income is foreign currency translation adjustments.

● Shipping and handling costs

All shipping and handling costs incurred by us are included in operating expenses on the statements of income. These costs totaled approximately $1,978,000, $1,767,000, and $1,725,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

● Advertising

With the exception of catalog costs, advertising costs are expensed as incurred. Catalog costs are capitalized and expensed over the estimated useful life of the particular catalog in question, which is typically twelve to eighteen months. Such capitalized costs are included in other current assets and totaled $168,000 and $181,000 at December 31, 2013 and 2012, respectively. Total advertising expense was $4,099,000 in 2013; $3,543,000 in 2012; and $2,972,000 in 2011.

● Cash flows presentation

For purposes of the statement of cash flows, we consider all highly liquid investments with initial maturities of three months or less from the date of purchase to be cash equivalents.