Lowe's 2012 Annual Report Download - page 50

36
The Company records an inventory reserve for the anticipated loss associated with selling inventories below cost. This
reserve is based on management’s current knowledge with respect to inventory levels, sales trends and historical
experience. 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 previous physical inventories. Changes in the
estimated shrink reserve are made based on the timing and results of physical inventories.
The Company receives funds from vendors in the normal course of business, principally as a result of purchase volumes,
sales, early payments or promotions of vendors’ products. Generally, these vendor funds do not represent the
reimbursement of specific, incremental and identifiable costs incurred by the Company to sell the vendor’s product.
Therefore, we treat these funds as a reduction in the cost of inventory as the amounts are accrued, and are recognized as a
reduction of cost of sales when the inventory is sold. Funds that are determined to be reimbursements of specific,
incremental and identifiable costs incurred to sell vendors’ products are recorded as an offset to the related expense. The
Company develops accrual rates for vendor funds based on the provisions of the agreements in place. Due to the
complexity and diversity of the individual vendor agreements, the Company performs analyses and reviews historical
trends throughout the year and confirms actual amounts with select vendors to ensure the amounts earned are appropriately
recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected annual
purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes
are met.
Derivative Financial Instruments - The Company occasionally utilizes derivative financial instruments to manage certain
business risks. However, the amounts were not material to the Company’s consolidated financial statements in any of the
years presented. The Company does not use derivative financial instruments for trading purposes.
Credit Programs - The majority of the Company’s accounts receivable arises from sales of goods and services to
commercial business customers. The Company has an agreement with GE Capital Retail (GE) under which GE purchases
at face value commercial business accounts receivable originated by the Company and services these accounts. This
agreement expires in December 2016, unless terminated sooner by the parties. The Company accounts for these transfers as
sales of the accounts receivable. 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 interests in the receivables.
Total commercial business accounts receivable sold to GE were $1.9 billion in 2012, $1.8 billion in 2011 and $1.7 billion
in 2010. The Company recognized losses of $30 million in 2012 and $31 million in both 2011 and 2010 on these receivable
sales as SG&A expense, which primarily relates to the fair value of the obligations incurred related to servicing costs that
are remitted to GE monthly. At February 1, 2013 and February 3, 2012, the fair value of the retained interests was
determined based on the present value of expected future cash flows and was insignificant.
Sales generated through the Company’s proprietary 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 2016. Tender costs, including amounts associated with accepting the Company’s proprietary credit cards, are
included in SG&A expense in the consolidated statements of earnings.
The total portfolio of receivables held by GE, including both receivables originated by GE from the Company’s proprietary
credit cards and commercial business accounts receivable originated by the Company and sold to GE, approximated $6.5
billion at February 1, 2013, and $6.0 billion at February 3, 2012.