Lowe's 2005 Annual Report Download - page 34

Note฀1SUMMARY฀OF฀SIGNIFICANT฀฀ ACCOUNTING฀POLICIES
Lowe’s฀Companies,฀Inc.฀and฀subsidiaries฀(the฀Company)฀is฀the฀world’s฀second฀
largest฀home฀improvement฀retailer฀and฀operated฀1,234฀stores฀in฀49฀states฀
at฀February฀3,฀2006.฀Below฀are฀those฀accounting฀policies฀considered฀to฀be฀
significant฀by฀the฀Company.
฀Fiscal฀Year฀–฀The฀Company’s฀fiscal฀year฀ends฀on฀the฀Friday฀nearest฀the฀
end฀of฀January.฀The฀fiscal฀year฀ended฀February฀3,฀2006฀had฀53฀weeks.฀The฀
fiscal฀years฀ended฀January฀28,฀2005฀and฀January฀30,฀2004฀had฀52฀weeks.฀All฀
references฀herein฀for฀the฀years฀2005,฀2004฀and฀2003฀represent฀the฀fiscal฀years฀
ended฀February฀3,฀2006,฀January฀28,฀2005฀and฀January฀30,฀2004,฀respectively.
฀Principles฀of฀Consolidation฀–฀The฀consolidated฀financial฀statements฀฀
include฀the฀accounts฀of฀the฀Company฀and฀its฀operating฀subsidiaries,฀all฀of฀
which฀are฀wholly-owned.฀All฀material฀intercompany฀accounts฀and฀transactions฀
have฀been฀eliminated.
฀Use฀of฀Estimates฀–฀The฀preparation฀of฀the฀Company’s฀financial฀statements฀
in฀accordance฀with฀accounting฀principles฀generally฀accepted฀in฀the฀United฀States฀
of฀America฀requires฀management฀to฀make฀estimates฀that฀affect฀the฀reported฀
amounts฀of฀assets,฀liabilities,฀sales฀and฀expenses฀and฀related฀disclosures฀of฀
contingent฀assets฀and฀liabilities.฀The฀Company฀bases฀these฀estimates฀on฀his-
torical฀results฀and฀various฀other฀assumptions฀believed฀to฀be฀reasonable,฀all฀of฀
which฀form฀the฀basis฀for฀making฀estimates฀concerning฀the฀carrying฀values฀of฀
assets฀and฀liabilities฀that฀are฀not฀readily฀available฀from฀other฀sources.฀Actual฀
results฀may฀differ฀from฀these฀estimates.
฀Cash฀and฀Cash฀Equivalents฀–฀Cash฀and฀cash฀equivalents฀include฀cash฀
on฀hand,฀demand฀deposits฀and฀short-term฀investments฀with฀original฀maturities฀
of฀three฀months฀or฀less฀when฀purchased.฀The฀majority฀of฀payments฀due฀from฀
financial฀institutions฀for฀the฀settlement฀of฀credit฀card฀and฀debit฀card฀transac-
tions฀process฀within฀two฀business฀days,฀and฀are฀therefore฀classified฀as฀cash฀
and฀cash฀equivalents.
฀Investments฀–฀The฀Company฀has฀a฀cash฀management฀program฀which฀
provides฀for฀the฀investment฀of฀cash฀balances฀not฀expected฀to฀be฀used฀in฀current฀
operations฀in฀financial฀instruments฀that฀have฀maturities฀of฀up฀to฀10฀years.฀Vari-
able฀rate฀demand฀notes฀and฀auction฀rate฀securities,฀which฀have฀stated฀maturity฀
dates฀of฀up฀to฀20฀years,฀meet฀this฀maturity฀requirement฀of฀the฀cash฀manage-
ment฀program฀because฀the฀maturity฀date฀of฀these฀investments฀is฀determined฀
based฀on฀the฀interest฀rate฀reset฀date฀for฀the฀purpose฀of฀applying฀this฀criteria.
฀ Investments,฀exclusive฀of฀cash฀equivalents,฀with฀a฀stated฀maturity฀date฀of฀
one฀year฀or฀less฀from฀the฀balance฀sheet฀date฀or฀that฀are฀expected฀to฀be฀used฀in฀
current฀operations,฀are฀classified฀as฀short-term฀investments.฀All฀other฀invest-
ments฀are฀classified฀as฀long-term.฀Investments฀consist฀primarily฀of฀certificates฀
of฀deposit,฀time฀deposits,฀U.S.฀dollar฀foreign฀government฀securities,฀money฀
market฀preferred฀stocks,฀municipal฀obligations,฀agency฀bonds,฀corporate฀notes฀
and฀bonds,฀auction฀rate฀securities฀and฀money฀market฀mutual฀funds.฀Also฀clas-
sified฀as฀investments฀are฀restricted฀balances฀pledged฀as฀collateral฀for฀a฀letter฀
of฀credit฀for฀the฀Company’s฀extended฀warranty฀program฀and฀for฀the฀Company’s฀
casualty฀insurance฀program฀liabilities.
฀ The฀Company฀has฀classified฀all฀investment฀securities฀as฀available-for-
sale,฀and฀they฀are฀carried฀at฀fair฀market฀value.฀Unrealized฀gains฀and฀losses฀on฀
such฀securities฀are฀included฀in฀accumulated฀other฀comprehensive฀income฀in฀
shareholders’฀equity.
฀Derivative฀Financial฀Instruments฀–฀The฀Company฀does฀not฀use฀deriva-
tive฀financial฀instruments฀for฀trading฀purposes.
฀Accounts฀Receivable฀–฀The฀majority฀of฀the฀Company’s฀accounts฀receiv-
able฀arise฀from฀sales฀of฀goods฀and฀services฀to฀Commercial฀Business฀Customers.฀
In฀May฀2004,฀the฀Company฀entered฀into฀an฀agreement฀with฀General฀Electric฀
Company฀and฀its฀subsidiaries฀(GE)฀to฀sell฀its฀then-existing฀portfolio฀of฀commercial฀
business฀accounts฀receivable฀to฀GE.฀During฀the฀term฀of฀the฀agreement,฀which฀
ends฀on฀December฀31,฀2009,฀unless฀terminated฀sooner฀by฀the฀parties,฀GE฀also฀
purchases฀at฀face฀value฀new฀commercial฀business฀accounts฀receivable฀origi-
nated฀by฀the฀Company฀and฀services฀these฀accounts.฀The฀Company฀accounts฀for฀
the฀transfers฀of฀the฀accounts฀receivable฀as฀sales.฀When฀the฀Company฀sells฀its฀
commercial฀business฀accounts฀receivable,฀it฀retains฀certain฀interests฀in฀those฀
receivables,฀including฀the฀funding฀of฀a฀loss฀reserve฀and฀its฀obligation฀related฀to฀
GE’s฀ongoing฀servicing฀of฀the฀receivables฀sold.฀Any฀gain฀or฀loss฀on฀the฀sale฀is฀
determined฀based฀on฀the฀previous฀carrying฀amounts฀of฀the฀transferred฀assets฀
allocated฀at฀fair฀value฀between฀the฀receivables฀sold฀and฀the฀interests฀retained.฀
Fair฀value฀is฀based฀on฀the฀present฀value฀of฀expected฀future฀cash฀flows฀taking฀
into฀account฀the฀key฀assumptions฀of฀anticipated฀credit฀losses,฀payment฀rates,฀
late฀fee฀rates,฀GE’s฀servicing฀costs฀and฀the฀discount฀rate฀commensurate฀with฀
the฀uncertainty฀involved.฀Due฀to฀the฀short-term฀nature฀of฀the฀receivables฀sold,฀
changes฀to฀the฀key฀assumptions฀would฀not฀materially฀impact฀the฀recorded฀
gain฀or฀loss฀on฀the฀sales฀of฀receivables฀or฀the฀fair฀value฀of฀the฀retained฀inter-
ests฀in฀the฀receivables.
฀ The฀initial฀portfolio฀of฀commercial฀business฀accounts฀receivable฀sold฀to฀
GE฀in฀May฀2004฀totaled฀$147฀million.฀Total฀commercial฀business฀accounts฀
receivable฀sold฀to฀GE฀were฀$1.7฀billion฀in฀2005฀and฀$1.2฀billion฀in฀2004.฀
During฀2005฀and฀2004,฀the฀Company฀recognized฀losses฀of฀$41฀million฀and฀
$34฀million,฀respectively,฀on฀these฀sales฀as฀selling,฀general฀and฀administrative฀
(SG&A)฀expense,฀which฀primarily฀relate฀to฀the฀fair฀value฀of฀the฀obligations฀
incurred฀related฀to฀servicing฀costs฀that฀are฀remitted฀to฀GE฀monthly.฀At฀฀
February฀3,฀2006฀and฀January฀28,฀2005,฀the฀fair฀value฀of฀the฀retained฀inter-
ests฀was฀insignificant฀and฀was฀determined฀based฀on฀the฀present฀value฀of฀
expected฀future฀cash฀flows.
฀ The฀allowance฀for฀doubtful฀accounts฀is฀based฀on฀historical฀experience฀
and฀a฀review฀of฀existing฀receivables.฀The฀allowance฀for฀doubtful฀accounts฀
was฀$0.8฀million฀at฀February฀3,฀2006,฀and฀$2฀million฀at฀January฀28,฀2005.
฀ Sales฀generated฀through฀the฀Company’s฀private฀label฀credit฀cards฀are฀
not฀reflected฀in฀receivables.฀Under฀an฀agreement฀with฀GE,฀credit฀is฀extended฀
directly฀to฀customers฀by฀GE.฀All฀credit฀program-related฀services฀are฀performed฀
and฀controlled฀directly฀by฀GE.฀The฀Company฀has฀the฀option,฀but฀no฀obligation,฀
to฀purchase฀the฀receivables฀at฀the฀end฀of฀the฀agreement฀in฀December฀2009.
฀ The฀total฀portfolio฀of฀receivables฀held฀by฀GE,฀including฀both฀receivables฀
originated฀by฀GE฀from฀the฀Company’s฀private฀label฀credit฀cards฀and฀commercial฀
business฀accounts฀receivable฀originated฀by฀the฀Company฀and฀sold฀to฀GE,฀approx-
imated฀$5.0฀billion฀at฀February฀3,฀2006,฀and฀$4.5฀billion฀at฀January฀28,฀2005.
฀Merchandise฀Inventory฀–฀Inventory฀is฀stated฀at฀the฀lower฀of฀cost฀or฀
market฀using฀the฀first-in,฀first-out฀method฀of฀inventory฀accounting.฀The฀cost฀
of฀inventory฀also฀includes฀certain฀costs฀associated฀with฀the฀preparation฀of฀
inventory฀for฀resale฀and฀distribution฀center฀costs,฀net฀of฀vendor฀funds.
฀ The฀Company฀records฀an฀inventory฀reserve฀for฀the฀loss฀associated฀with฀
selling฀discontinued฀inventories฀below฀cost.฀This฀reserve฀is฀based฀on฀manage-
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฀ L O W E ’ S ฀ ฀2 0 0 5 ฀ ฀A N N U A L ฀ ฀R E P O RT
Notes฀to฀Consolidated฀Financial฀Statements
YE AR S฀ END ED ฀F EBR UARY ฀3 ,฀200 6,฀JA NU ARY฀ 28 ,฀ 200 5฀AND ฀J AN UARY ฀3 0,฀ 20 04