Lowe's 2015 Annual Report Download - page 36

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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.
Judgments and uncertainties involved in the estimate
We do not believe that our merchandise inventories are subject to significant risk of obsolescence in the near term, and we have
the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes
in consumer purchasing patterns or a deterioration in product quality could result in the need for additional reserves. Likewise,
changes in the estimated shrink reserve may be necessary, based on the timing and results of physical inventories. We also
apply judgment in the determination of levels of obsolete inventory and assumptions about net realizable value.
For vendor funds, we develop accrual rates based on the provisions of the agreements in place. Due to the complexity and
diversity of the individual vendor agreements, we perform analyses and review historical purchase trends and volumes
throughout the year, adjust accrual rates as appropriate and confirm 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 purchase volumes, especially in the case of programs that provide for increased funding when graduated
purchase volumes are met.
Effect if actual results differ from assumptions
We have not made any material changes in the methodology used to establish our inventory valuation or the related reserves for
obsolete inventory or inventory shrinkage during the past three fiscal years. We believe that we have sufficient current and
historical knowledge to record reasonable estimates for both of these inventory reserves. However, it is possible that actual
results could differ from recorded reserves. A 10% change in either the amount of products considered obsolete or the
weighted average estimated loss rate used in the calculation of our obsolete inventory reserve would have affected net earnings
by approximately $2 million for 2015. A 10% change in the estimated shrinkage rate included in the calculation of
our inventory shrinkage reserve would have affected net earnings by approximately $10 million for 2015.
We have not made any material changes in the methodology used to recognize vendor funds during the past three fiscal
years. If actual results are not consistent with the assumptions and estimates used, we could be exposed to additional
adjustments that could positively or negatively impact gross margin and inventory. However, substantially all receivables
associated with these activities do not require subjective long-term estimates because they are collected within the following
fiscal year. Adjustments to gross margin and inventory in the following fiscal year have historically not been material.
Equity Method Investments
Description
We use the equity method to account for investments in companies if the investment provides the ability to exercise significant
influence, but not control, over operating and financial policies of the investee. Our proportionate share of the net income or
loss of these companies is included in consolidated net earnings. Each of the Company’s equity method investments is subject
to a review for impairment if, and when, circumstances indicate that the fair value of our investment could be less than the
carrying value. If the results of our review indicate an other than temporary decline in the carrying value of our investment, the
Company would write down the investment to its estimated fair value.
Judgments and uncertainties involved in the estimate
Our impairment evaluations for equity method investments require us to apply judgment in determining whether a decrease in
value that is other than temporary has occurred. If we need to assess the recoverability of our equity method investments, we
will make assumptions regarding estimated future cash flows of those investments. These calculations require us to apply
judgments, including assumptions of future performance, based on business plans and forecasts, recent economic and business
trends, and competitive conditions.
Effect if actual results differ from assumptions
In the fourth quarter of fiscal year 2015, we made the decision to exit our Australian joint venture investment with Woolworths
Limited (Woolworths) and recorded a $530 million impairment of our investment due to a determination that there was a
decrease in value that was other than temporary. We own a one-third share in the joint venture, Hydrox Holdings Pty Ltd.,
which operates Masters Home Improvement stores and Home Timber and Hardware Group’s retail stores and wholesale
distribution in Australia. As a result of our decision to exit, Woolworths will be required to purchase Lowe’s one-third share in
the joint venture at an agreed upon fair value as of January 18, 2016, the date of our notification of our intention to exit. The
process for the two parties agreeing on fair value is prescribed in the Joint Venture Agreement. Finalization of the purchase
price for Lowe’s interest in the joint venture and completion of the sale is expected to occur in 2016. The $530 million non-
cash impairment charge, which includes the cumulative impact of the strengthening U.S. dollar over the life of the investment,