Lowe's 2005 Annual Report Download - page 35

ment’s฀current฀knowledge฀with฀respect฀to฀inventory฀levels,฀sales฀trends฀and฀
historical฀experience฀relating฀to฀the฀liquidation฀of฀discontinued฀inventory.฀
Management฀does฀not฀believe฀the฀Company’s฀merchandise฀inventories฀are฀
subject฀to฀significant฀risk฀of฀obsolescence฀in฀the฀near฀term,฀and฀management฀
has฀the฀ability฀to฀adjust฀purchasing฀practices฀based฀on฀anticipated฀sales฀trends฀
and฀general฀economic฀conditions.฀However,฀changes฀in฀consumer฀purchasing฀
patterns฀could฀result฀in฀the฀need฀for฀additional฀reserves.฀The฀Company฀also฀
records฀an฀inventory฀reserve฀for฀the฀estimated฀shrinkage฀between฀physical฀
inventories.฀This฀reserve฀is฀based฀primarily฀on฀actual฀shrink฀results฀from฀pre-
vious฀physical฀inventories.฀Changes฀in฀actual฀shrink฀results฀from฀completed฀
physical฀inventories฀could฀result฀in฀revisions฀to฀previously฀estimated฀shrink฀
expense.฀Management฀believes฀it฀has฀sufficient฀current฀and฀historical฀knowl-
edge฀to฀record฀reasonable฀estimates฀for฀both฀of฀these฀inventory฀reserves.
฀Property฀and฀Depreciation฀–฀Property฀is฀recorded฀at฀cost.฀Costs฀asso-
ciated฀with฀major฀additions฀are฀capitalized฀and฀depreciated.฀Capital฀assets฀are฀
expected฀to฀yield฀future฀benefits฀and฀have฀useful฀lives฀which฀exceed฀one฀year.฀The฀
total฀cost฀of฀a฀capital฀asset฀generally฀includes฀all฀applicable฀sales฀taxes,฀delivery฀
costs,฀installation฀costs฀and฀other฀appropriate฀costs฀incurred฀by฀the฀Company฀
in฀the฀case฀of฀self-constructed฀assets.฀Upon฀disposal,฀the฀cost฀of฀properties฀and฀
related฀accumulated฀depreciation฀are฀removed฀from฀the฀accounts,฀with฀gains฀and฀
losses฀reflected฀in฀SG&A฀expense฀in฀the฀consolidated฀statements฀of฀earnings.
฀ Depreciation฀is฀provided฀over฀the฀estimated฀useful฀lives฀of฀the฀depreciable฀
assets.฀Assets฀are฀depreciated฀using฀the฀straight-line฀method.฀Leasehold฀improve-
ments฀are฀depreciated฀over฀the฀shorter฀of฀their฀estimated฀useful฀lives฀or฀the฀term฀
of฀the฀related฀lease,฀which฀may฀include฀one฀or฀more฀option฀renewal฀periods฀where฀
failure฀to฀exercise฀such฀options฀would฀result฀in฀an฀economic฀penalty฀in฀such฀
amount฀that฀renewal฀appears,฀at฀the฀inception฀of฀the฀lease,฀to฀be฀reasonably฀
assured.฀During฀the฀term฀of฀a฀lease,฀if฀a฀substantial฀additional฀investment฀is฀
made฀in฀a฀leased฀location,฀the฀Company฀reevaluates฀its฀definition฀of฀lease฀term฀
to฀determine฀whether฀the฀investment,฀together฀with฀any฀penalties฀related฀to฀non-
renewal,฀would฀constitute฀an฀economic฀penalty฀in฀such฀amount฀that฀renewal฀
appears,฀at฀the฀time฀of฀the฀reevaluation,฀to฀be฀reasonably฀assured.
฀Long-Lived฀Assets/Store฀Closing฀–฀Losses฀related฀to฀impairment฀of฀
long-lived฀assets฀are฀recognized฀when฀circumstances฀indicate฀the฀carrying฀
values฀of฀the฀assets฀may฀not฀be฀recoverable.฀When฀management฀commits฀to฀
close฀or฀relocate฀a฀store฀location,฀or฀when฀there฀are฀indicators฀that฀the฀carry-
ing฀value฀of฀a฀long-lived฀asset฀may฀not฀be฀recoverable,฀the฀Company฀evaluates฀
the฀carrying฀value฀of฀the฀asset฀in฀relation฀to฀its฀expected฀undiscounted฀future฀
cash฀flows.฀If฀the฀carrying฀value฀of฀the฀assets฀is฀greater฀than฀the฀expected฀
undiscounted฀future฀cash฀flows฀and฀the฀fair฀value฀of฀the฀assets฀is฀less฀than฀the฀
carrying฀value,฀a฀provision฀is฀made฀for฀the฀impairment฀of฀the฀assets฀based฀on฀
the฀excess฀of฀carrying฀value฀over฀fair฀value.฀The฀fair฀value฀of฀the฀assets฀is฀gen-
erally฀based฀on฀appraisals฀and฀the฀Company’s฀historical฀experience.
฀ When฀a฀leased฀location฀is฀closed,฀a฀provision฀is฀made฀for฀the฀present฀value฀
of฀future฀lease฀obligations,฀including฀property฀taxes,฀utilities,฀and฀common฀area฀
maintenance,฀net฀of฀anticipated฀sublease฀income.฀Provisions฀for฀impairment฀and฀
store฀closing฀costs฀are฀included฀in฀SG&A฀expenses.฀The฀store฀closing฀liability฀is฀
included฀in฀other฀current฀liabilities฀in฀the฀consolidated฀balance฀sheets.
฀Leases฀–฀Assets฀under฀capital฀leases฀are฀amortized฀in฀accordance฀with฀
the฀Company’s฀normal฀depreciation฀policy฀for฀owned฀assets฀or฀if฀shorter,฀over฀
the฀non-cancelable฀lease฀term฀and฀any฀option฀renewal฀period฀where฀failure฀to฀
exercise฀such฀option฀would฀result฀in฀an฀economic฀penalty฀in฀such฀amount฀
that฀renewal฀appears,฀at฀the฀inception฀of฀the฀lease,฀to฀be฀reasonably฀assured.฀
During฀the฀term฀of฀a฀lease,฀if฀a฀substantial฀additional฀investment฀is฀made฀in฀
a฀leased฀location,฀the฀Company฀reevaluates฀its฀definition฀of฀lease฀term.฀The฀
charge฀to฀earnings฀is฀included฀in฀depreciation฀expense฀in฀the฀consolidated฀
financial฀statements.
฀ For฀lease฀agreements฀that฀provide฀for฀escalating฀rent฀payments฀or฀free-rent฀
occupancy฀periods,฀the฀Company฀recognizes฀rent฀expense฀on฀a฀straight-line฀
basis฀over฀the฀non-cancelable฀lease฀term฀and฀option฀renewal฀periods฀where฀
failure฀to฀exercise฀such฀options฀would฀result฀in฀an฀economic฀penalty฀in฀such฀
amount฀that฀renewal฀appears,฀at฀the฀inception฀of฀the฀lease,฀to฀be฀reasonably฀
assured.฀The฀lease฀term฀commences฀on฀the฀date฀when฀all฀conditions฀precedent฀
to฀the฀Company’s฀obligation฀to฀pay฀rent฀are฀satisfied.฀Deferred฀rent฀is฀included฀
in฀other฀long-term฀liabilities฀in฀the฀consolidated฀balance฀sheets.
฀Self-Insurance฀–฀The฀Company฀is฀self-insured฀for฀certain฀losses฀relating฀
to฀workers’฀compensation,฀automobile,฀property,฀and฀general฀and฀product฀liabil-
ity฀claims.฀The฀Company฀has฀stop-loss฀coverage฀to฀limit฀the฀exposure฀arising฀
from฀these฀claims.฀The฀Company฀is฀also฀self-insured฀for฀certain฀losses฀relating฀
to฀medical฀and฀dental฀claims.฀Self-insurance฀claims฀filed฀and฀claims฀incurred฀
but฀not฀reported฀are฀accrued฀based฀upon฀management’s฀estimates฀of฀the฀dis-
counted฀ultimate฀cost฀for฀uninsured฀claims฀incurred฀using฀actuarial฀assump-
tions฀followed฀in฀the฀insurance฀industry฀and฀historical฀experience.฀Although฀
management฀believes฀it฀has฀the฀ability฀to฀adequately฀record฀estimated฀losses฀
related฀to฀claims,฀it฀is฀possible฀that฀actual฀results฀could฀differ฀from฀recorded฀
self-insurance฀liabilities.
฀Income฀Taxes฀–฀The฀Company฀establishes฀deferred฀income฀tax฀assets฀
and฀liabilities฀for฀temporary฀differences฀between฀the฀tax฀and฀financial฀account-
ing฀bases฀of฀assets฀and฀liabilities.฀The฀tax฀effects฀of฀such฀differences฀are฀
reflected฀in฀the฀balance฀sheet฀at฀the฀enacted฀tax฀rates฀expected฀to฀be฀in฀effect฀
when฀the฀differences฀reverse.฀The฀tax฀balances฀and฀income฀tax฀expense฀
recognized฀by฀the฀Company฀are฀based฀on฀what฀management฀believes฀are฀rea-
sonable฀interpretations฀of฀the฀tax฀statutes฀of฀multiple฀jurisdictions.
฀Store฀Opening฀Costs฀–฀Costs฀of฀opening฀new฀or฀relocated฀retail฀stores,฀
which฀include฀payroll฀and฀supply฀costs฀incurred฀prior฀to฀store฀opening฀and฀
grand฀opening฀advertising฀costs,฀are฀charged฀to฀operations฀as฀incurred.
฀Revenue฀Recognition฀–฀The฀Company฀recognizes฀revenues,฀net฀of฀sales฀
tax,฀when฀sales฀transactions฀occur฀and฀customers฀take฀possession฀of฀the฀mer-
chandise.฀A฀provision฀for฀anticipated฀merchandise฀returns฀is฀provided฀through฀
a฀reduction฀of฀sales฀and฀cost฀of฀sales฀in฀the฀period฀that฀the฀related฀sales฀are฀
recorded.฀Revenues฀from฀product฀installation฀services฀are฀recognized฀when฀the฀
installation฀is฀completed.฀Deferred฀revenues฀associated฀with฀amounts฀received฀
for฀which฀customers฀have฀not฀yet฀taken฀possession฀of฀merchandise฀or฀for฀which฀
installation฀has฀not฀yet฀been฀completed฀were฀$377฀million฀and฀$265฀million฀
at฀February฀3,฀2006,฀and฀January฀28,฀2005,฀respectively.
฀ Revenues฀from฀stored฀value฀cards,฀which฀include฀gift฀cards฀and฀returned฀
merchandise฀credits,฀are฀deferred฀and฀recognized฀when฀the฀cards฀are฀redeemed.฀
The฀liability฀associated฀with฀outstanding฀stored฀value฀cards฀was฀$293฀million฀
and฀$264฀million฀at฀February฀3,฀2006,฀and฀January฀28,฀2005,฀respectively,฀and฀
these฀amounts฀are฀included฀in฀deferred฀revenue฀in฀the฀accompanying฀consoli-
dated฀balance฀sheets.฀The฀Company฀recognizes฀income฀from฀unredeemed฀
stored฀value฀cards฀at฀the฀point฀at฀which฀redemption฀becomes฀remote.฀As฀the฀
Company’s฀stored฀value฀cards฀have฀no฀expiration,฀the฀Company฀performs฀an฀
evaluation฀based฀on฀an฀aging฀of฀the฀unredeemed฀cards,฀based฀on฀the฀date฀of฀
last฀stored฀value฀card฀use,฀to฀determine฀when฀redemption฀is฀remote.฀
฀Extended฀Warranties฀–฀Beginning฀in฀2003,฀Lowe’s฀began฀selling฀sepa-
rately฀priced฀extended฀warranty฀contracts฀under฀a฀new฀Lowe’s-branded฀program฀
for฀which฀the฀Company฀is฀the฀primary฀obligor.฀The฀Company฀recognizes฀revenue฀
from฀extended฀warranty฀sales฀on฀a฀straight-line฀basis฀over฀the฀respective฀con-
tract฀term.฀Incremental฀direct฀acquisition฀costs฀associated฀with฀the฀sale฀of฀
extended฀warranties฀are฀also฀deferred฀and฀recognized฀as฀expense฀on฀a฀straight-
line฀basis฀over฀the฀respective฀contract฀term.฀Extended฀warranty฀contract฀terms฀
range฀from฀one฀to฀four฀years฀from฀the฀date฀of฀purchase.฀All฀other฀costs,฀such฀
as฀costs฀of฀services฀performed฀under฀the฀contract,฀general฀and฀administrative฀
L O W E ’ S ฀ ฀2 0 0 5 ฀ ฀A N N U A L ฀ ฀R E P O R T ฀
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