Lowe's 2013 Annual Report Download - page 33

25
We evaluate locations for triggering events relating to long-lived asset impairment on a quarterly basis to determine when a
location’s asset carrying values may not be recoverable. For operating locations, our primary indicator that asset carrying
values may not be recoverable is consistently negative cash flow for a 12-month period for those locations that have been open
in the same location for a sufficient period of time to allow for meaningful analysis of ongoing operating results. Management
also monitors other factors when evaluating operating locations for impairment, including individual locations’ execution of
their operating plans and local market conditions, including incursion, which is the opening of either other Lowe’s locations or
those of a direct competitor within the same market. We also consider there to be a triggering event when there is a current
expectation that it is more likely than not that a given location will be closed significantly before the end of its previously
estimated useful life.
A potential impairment has occurred if projected future undiscounted cash flows expected to result from the use and eventual
disposition of the location’s assets are less than the carrying amount of the assets. When determining the stream of projected
future cash flows associated with an individual operating location, management makes assumptions, incorporating local market
conditions, about key store variables including sales growth rates, gross margin and controllable expenses, such as store payroll
and occupancy expense, as well as asset residual values or lease rates. An impairment loss is recognized when the carrying
amount of the operating location is not recoverable and exceeds its fair value.
We use an income approach to determine the fair value of our individual operating locations, which requires discounting
projected future cash flows. This involves making assumptions regarding both a location’s future cash flows, as described
above, and an appropriate discount rate to determine the present value of those future cash flows. We discount our cash flow
estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows. The selected
market participants represent a group of other retailers with a market footprint similar in size to ours.
Judgments and uncertainties involved in the estimate
Our impairment evaluations require us to apply judgment in determining whether a triggering event has occurred, including the
evaluation of whether it is more likely than not that a location will be closed significantly before the end of its previously
estimated useful life. Our impairment loss calculations require us to apply judgment in estimating expected future cash flows,
including estimated sales, margin and controllable expenses, and assumptions about market performance for operating locations
and estimated selling prices or lease rates for locations identified for closure. We also apply judgment in estimating asset fair
values, including the selection of an appropriate discount rate for fair values determined using an income approach.
Effect if actual results differ from assumptions
During 2013, 15 operating locations experienced a triggering event and were evaluated for recoverability. One of the 15
operating locations was determined to be impaired. We recorded impairment losses related to this operating location of $26
million during 2013, compared to impairment losses on operating locations of $55 million during 2012.
We have not made any material changes in the methodology used to estimate the future cash flows of operating locations or
locations identified for closure during the past three fiscal years. If the actual results are not consistent with the assumptions
and judgments we have made in determining whether it is more likely than not that a location will be closed significantly
before the end of its useful life or in estimating future cash flows and determining asset fair values, our actual impairment
losses could vary positively or negatively from our estimated impairment losses.
Fourteen of the 15 operating locations that experienced a triggering event during 2013 were determined to be recoverable and
therefore were not impaired. For 11 of these 14 locations, the expected undiscounted cash flows substantially exceeded the net
book value of the location’s assets. For these 11 locations, a 10% reduction in projected sales used to estimate future cash
flows at the latest date these operating locations were evaluated for impairment would have resulted in the impairment of four
of these locations and increased recognized impairment losses by $39 million.
Three of the operating locations with a net book value of $25 million had expected undiscounted cash flows that exceeded the
net book value of its assets by less than a substantial amount. A 10% reduction in projected sales used to estimate future cash
flows at the date these operating locations were evaluated for impairment would have resulted in the impairment of these three
locations and increased recognized impairment losses by $23 million.
We analyzed other assumptions made in estimating the future cash flows of the operating locations evaluated for impairment,
but the sensitivity of those assumptions was not significant to the estimates.