Operational Assets-Case of American Eagle Outfitters Inc

Operational Assets-Case of American Eagle Outfitters Inc

The information discussed in this paper relates to the operational assets of American Eagle Outfitters Inc. The paper addresses these assets by discussing operational assets as a concept and the type of operational assets held by the company. The information used in the discussion is drawn from the company’s financial position statement and notes to the financial statements (American Eagle Outfitters Inc., 2020).

Types of Operational Assets

All liquid, tangible, and intangible assets directly supporting business operations and generating revenue are referred to as operating assets. Additionally, operational assets shed light on a business’s net operating assets and operating asset turnover rate, two significant indicators of how successfully a business earns income. Firms compute various operational asset categories for their balance sheets and other financial records. Most companies and organizations have several categories of operational assets. Cash assets are the first category. A company’s liquid assets can be quickly turned into cash. A business often possesses a variety of cash-equivalent assets, such as its inventory of products, office supplies, machinery, stock shares, and marketable securities, in addition to its accounts receivable. Tangible and intangible assets are acceptable if the business quickly turns them into hard currency. All highly liquid investments acquired by American Eagle Outfitters Inc. with a three-month or less remaining maturity are regarded as cash equivalents. For the fiscal period that ended in February 2020, certificates containing a maturity period of less than a year but more than three months were part of the short-term assets deemed eligible for sale.

The second category for American Eagle Outfitters Inc. is called prepaid expenses. Essentially, the assets a business has because of paying in advance for goods or services they will get later are included in prepaid costs. For example, an organization may pay the entire insurance cost for many months at once to obtain coverage over time. Tax deferrals may also be included in these assets. Prepaid fees are usually first recorded by businesses as assets on the balance sheet, but over time, the industry adds these expensed items to the profit and loss statement. Fixed assets are the third category of operational assets for the company. Purchases a firm makes for long-term usage to sustain operations and create income are referred to as fixed assets. These assets are problematic for businesses to convert into cash since they are not easily liquid. Furthermore, companies often employ fixed assets for production rather than sales or consumption of goods and services. Fixed assets include corporate cars, buildings, land, and equipment; these are shown as property, plant, and equipment (PP&E) on the balance sheet.

Tangible assets are the fourth category of operational assets for the company. Physical assets are included in the category of tangible assets. Tangible assets include product inventories, machinery, office supplies, real estate, and securities like stocks, money, and bonds. Tangible assets can either be liquid or fixed. Certain fixed physical assets, including machinery, equipment, and cars, can lose value with time. For American Eagle Outfitters Inc., tangible assets include buildings, fixtures and equipment, leasehold equipment, and information technology.

Intangibles

Non-physical assets of a business with a useful life exceeding a year are considered intangible assets. A corporation usually acquires intangible assets, and as part of the acquisition, the firm allocates a percentage of the purchase price to the intangible assets it has just purchased. A firm may list patents, trademarks, intellectual property, internet domains, and copyrighted works as examples of intangible assets on its balance sheet. The major intangible asset for American Eagle Outfitters Inc. is goodwill. The purchase of the company’s importing activities, Canada business, Todd Snyder brands, Tailgate, and its commercial dealings are the leading causes of its goodwill. As per ASC 350, Goodwill and Other- Intangibles (“ASC 350”), the firm assesses goodwill for potential impairment at least once a year. As of February 1, 2020, the latest annual impairment test was conducted. The company concluded that particular goodwill was impaired, and the Consolidated Statements of Operations showed a $1.7 million charge related to impairment and restructuring expenses. During Fiscal 2018, no goodwill impairment charges were reported.

Inventory Costing Methods Used at American Eagle Outfitters

Inventory costing methods only affect the physical commodities the company maintains in its stores. The goods are subjected to costing to ensure the fair value figures are recorded in the company’s financial statements. Using the retail approach, merchandise inventory is appraised at the average cost or lower of net realizable value. The average price covers related charges and item design and sourcing fees. When the company gains custody of the item, it keeps track of the inventory receipts. As a measure to identify slow-moving goods, the business analyzes its levels of inventory. Markdowns are typically used to clear inventory. Also, the company projects a markdown cushion for scheduled permanent deductions of current merchandise in the future.

Markdowns can happen when merchandise surpasses consumer demand due to factors including seasonal adaption, style, customer preference changes, competition, or the inability of customers to accept fashion products. They may also happen if it’s judged that what is left in stock will not sell at the current market price. Based on the degree and inventory volume impacted, such markdowns might negatively affect profitability. In addition, the company projects a diminished reserve for the period between the date of the balance sheet and the most recent physical count. Modifications in the item mix and shifts in the actual shrinkage trends may impact the shrinkage reserve estimate, which is based on past performance.

Depreciation Methods Used at American Eagle Outfitters

For American Eagle Outfitters’ intangible assets, the cost is the basis for recording, and amortization is computed utilizing the straight-line approach throughout the anticipated assets’ valuable lifetimes. Trademark assets make up most of the company’s definite-lived intangible assets, commonly amortized over 15 to 26 years. In compliance with ASC 360, the firm evaluates definite-lived intangible assets for depreciation if circumstances or events suggest that the asset’s carrying value could not be recovered. The evaluation of undiscounted forthcoming cash flows that those assets will offer is a component of this evaluation. The assets are considered depreciated and are subsequently adjusted to their approximated fair valuation if the gross of the estimated future undiscounted cash flows is lower than the carrying values of the assets. No costs for the impairment of definite-lived intangible assets were captured for all fiscal periods shown in the company’s financial statements.

When recording equipment property, cost is the primary consideration, and depreciation is computed utilizing the straight-line technique over the projected reasonable assets’ lifetimes. The following are the useful lifetimes of the leading asset types owned by the company:

Table 1

Useful Lifetimes of the Leading Asset Types Owned by American Eagle Outfitters Inc.

Equipment and fixtures	Five years
Buildings	25 years
Information technology	Three to five years
Leasehold improvements	Lesser of 10 years

The weighted average remaining usable life of the company’s assets was around 7.5 years as of February 2020. The company’s management assesses the leasehold enhancements value, store equipment, and ROU operating lease assets connected with retail outlets that have been operated for long to achieve maturity in compliance with ASC 360, Plant, Property, and Equipment (“ASC 360”). Since individual stores are the minor level where separate cash flows can be identified, the company assesses long-lived assets for depreciation at that level. When occurrences and conditions indicate that long-lived assets deployed in operations may be depreciated and the planned undiscounted cash flows those assets are anticipated to generate are lower than the carried amounts, losses due to impairment are taken on those assets. In such cases, an impairment loss is given independently as an element of operating revenue within restructuring and impairment costs, and the depreciated assets are recalculated to their assessed fair value.

American Eagle Outfitters Inc. recognized asset impairment costs of $64.5 million on its holdings of 20 retail locations during the 2019 fiscal year. Of the total, $25.0 million was connected to the depreciation of the operating lease ROU assets and $39.5 million to the depreciation of leasehold enhancements and retail fixtures. The fourth quarter of Fiscal 2019 saw a comprehensive portfolio assessment that considered current and future performance estimates and strategic real estate objectives (American Eagle Outfitters Inc., 2020). Notably, this led to the recording of impairments due to store performance up to and including the Christmas selling season. The company concluded that these locations would not be able to make enough money throughout the anticipated remaining lease period to pay the carrying value of the assets in each store.

References

American Eagle Outfitters, Inc. (2020). Annual report. https://www.sec.gov/Archives/edgar/data/919012/000156459020010469/aeo-10k_20200201.htm

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In this unit, you will continue to analyze and interpret the financial statements for American Eagle Outfitters, Inc. Using the financial statements (located in Appendix A: American Eagle Outfitters, Inc., 2020 Annual Report of the required textbook: Financial Accounting), review the company’s operational assets.

Consider the following questions:

What types of operational assets does the company have?

Are there any intangibles?

What inventory costing methods are used?

What depreciation methods are used?

Deliverable Requirements: Your evaluation of the company’s operational assets should have at least 5 pages (the title and reference pages are not counted in these 5 pages) as well as follow the requirements below for using the APA style.

For your evaluation of the operational assets, present industry findings regarding assets.

Address the questions above and consider their implications for American Eagle Outfitters, Inc.

Do not forget to review the notes to the financial statements for additional information about the company’s operational assets.