Best Buy 2014 Annual Report Download - page 53

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disposal of the inventory, and establish a new cost basis. Subsequent changes in facts or circumstances do not result in the
reversal of previously recorded markdowns or an increase in that newly established cost basis. Markdown adjustments involve
uncertainty because the calculations require management to make assumptions and to apply judgment regarding inventory
aging, forecast consumer demand, the promotional environment and technological obsolescence.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we
use to calculate our markdowns. However, if estimates regarding consumer demand are inaccurate or changes in technology
affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains that could be material. A
10% change in our markdown reserve percentage at February 1, 2014, would have affected net earnings by approximately
$7 million in fiscal 2014.
Inventory loss adjustments reflect anticipated physical inventory losses (e.g., theft) that have occurred since the last physical
inventory based on a percentage of net sales. Inventory loss adjustments involve uncertainty because the calculations require
management to make assumptions and to apply judgment regarding a number of factors, including historical results,
expectations of future inventory loss and current inventory loss trends. Our inventory loss estimate is verified by ongoing
physical inventory counts. Historically, our annual physical inventory count results have shown our estimates to be reliable.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we
use to calculate our inventory loss adjustment. However, if our estimates regarding physical inventory losses are inaccurate, we
may be exposed to losses or gains that could be material. A 10% change in our physical inventory loss percentage at February
1, 2014, would have affected net earnings by approximately $6 million in fiscal 2014.
Vendor Allowances
We receive allowances from certain vendors through a variety of programs and arrangements intended to offset our costs of
promoting and selling merchandise inventories. Receipt-based funds represent one form of our vendor allowances. Receipt-
based funds are generally determined at an agreed percentage of purchases and are initially deferred and recorded as a
reduction of merchandise inventories. The deferred amounts are then included as a reduction of cost of goods sold when the
related product is sold. We estimate the amount of vendor funding to be deferred and recorded as a reduction of inventory at the
end of each period, based on detailed analysis of inventory turns and applicable vendor funding rates.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we
use to calculate our vendor funding deferral. However, if actual results are not consistent with the assumptions and estimates
used, we may be exposed to additional adjustments that could materially, either positively or negatively, impact our gross profit
rate and inventory. A 10% difference in our vendor funding deferral at February 1, 2014, would have affected net earnings by
approximately $17 million in fiscal 2014.
Long-Lived Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying value may not be recoverable.
When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset's
estimated future cash flows (undiscounted and without interest charges). If the sum of the estimated future cash flows is less
than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying
value of the asset to the asset's estimated fair value, which may be based on estimated discounted cash flows. We recognize an
impairment loss if the amount of the asset's carrying value exceeds the asset's estimated fair value. If we recognize an
impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the
new cost basis will be depreciated over the remaining useful life of that asset.
When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level
for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For long-lived assets
deployed at store locations, we review for impairment at the individual store level. These reviews involve comparing the
carrying value of all land, buildings, leasehold improvements, fixtures and equipment located at each store to the net cash flow
projections for each store. In addition, we conduct separate impairment reviews at other levels as appropriate. For example, a
shared asset such as a distribution center would be evaluated by reference to the aggregate assets, liabilities and projected cash
flows of all areas of the businesses utilizing those shared assets.