Walmart 2012 Annual Report Download - page 31
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Please find page 31 of the 2012 Walmart annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Walmart 2012 Annual Report 2 9
As of January 31, 2012, our variable rate borrowings, including the eff ect
of our commercial paper and interest rate swaps, represented 17% of our
total short-term and long-term debt. Based on January 31, 2012 and 2011
debt levels, a 100 basis point change in prevailing market rates would
cause our annual interest costs to change by approximately $58 million
and $59 million, respectively.
Foreign Currency Risk
We are exposed to changes in foreign currency exchange rates as a result
of our net investments and operations in countries other than the United
States. We hedge a portion of our foreign currency risk by entering into
currency swaps and designating certain long-term debt issued in foreign
currencies as net investment hedges.
We hold currency swaps to hedge the currency exchange component
of our net investments and also to hedge the currency exchange rate
fl uctuation exposure associated with the forecasted payments of principal
and interest of non-U.S. denominated debt. The aggregate fair value of
these swaps was recorded as an asset of $313 million and $471 million
at January 31, 2012 and 2011, respectively. A hypothetical 10% increase or
decrease in the currency exchange rates underlying these swaps from the
market rate would have resulted in a loss or gain in the value of the swaps
of $67 million and $74 million at January 31, 2012 and 2011, respectively.
A hypothetical 10% change in interest rates underlying these swaps from
the market rates in eff ect at January 31, 2012 and 2011 would have resulted
in a loss or gain in value of the swaps of $21 million and $7 million,
respectively, on the value of the swaps.
In addition to currency swaps, we have designated debt of approximately
£3.0 billion as of January 31, 2012 and 2011 as a hedge of our net investment
in the United Kingdom. At January 31, 2012 and 2011, a hypothetical
10% increase or decrease in value of the U.S. dollar relative to the British
pound would have resulted in a gain or loss, respectively, in the value of
the debt of $430 million and $480 million, respectively. In addition, we
have designated debt of approximately ¥275.0 billion and ¥437.0 billion
as of January 31, 2012 and 2011, respectively, as a hedge of our net invest-
ment in Japan. At January 31, 2012 and 2011, a hypothetical 10% increase
or decrease in value of the U.S. dollar relative to the Japanese yen would
have resulted in a gain or loss in the value of the debt of $328 million and
$533 million, respectively.
Summary of Critical Accounting Estimates
Management strives to report our fi nancial results in a clear and
understandable manner, although in some cases accounting and
disclosure rules are complex and require us to use technical terminology.
In preparing the Company’s Consolidated Financial Statements, we
follow accounting principles generally accepted in the United States.
These principles require us to make certain estimates and apply judgments
that aff ect our fi nancial position and results of operations as refl ected in
our fi nancial statements. These judgments and estimates are based on
past events and expectations of future outcomes. Actual results may
diff er from our estimates.
Management continually reviews our accounting policies, how they
are applied and how they are reported and disclosed in our fi nancial
statements. Following is a summary of our critical accounting estimates
and how they are applied in preparation of the fi nancial statements.
Inventories
We value inventories at the lower of cost or market as determined primarily
by the retail method of accounting, using the last-in, fi rst-out (“LIFO”)
method for substantially all of the Walmart U.S. segment’s merchandise
inventories. The retail method of accounting results in inventory being
valued at the lower of cost or market since permanent markdowns are
currently taken as a reduction of the retail value of inventory. The Sam’s
Club segment’s merchandise is valued based on the weighted-average
cost using the LIFO method. Inventories for the Walmart International
operations are primarily valued by the retail method of accounting and
are stated using the fi rst-in, fi rst-out (“FIFO”) method.
Under the retail method, inventory is stated at cost, which is determined
by applying a cost-to-retail ratio to each merchandise grouping’s retail
value. The FIFO cost-to-retail ratio is based on the initial margin of
beginning inventory plus the fi scal year purchase activity. The cost-to-
retail ratio for measuring any LIFO provision is based on the initial margin
of the fi scal year purchase activity less the impact of any markdowns. The
retail method requires management to make certain judgments and
estimates that may signifi cantly impact the ending inventory valuation at
cost, as well as the amount of gross profi t recognized. Judgments made
include recording markdowns used to sell inventory and shrinkage.
When management determines the salability of inventory has diminished,
markdowns for clearance activity and the related cost impact are recorded.
Factors considered in the determination of markdowns include current
and anticipated demand, customer preferences and age of merchandise,
as well as seasonal and fashion trends. Changes in weather patterns and
customer preferences related to fashion trends could cause material
changes in the amount and timing of markdowns from year to year.
When necessary, we record a LIFO provision for the estimated annual
eff ect of infl ation, and these estimates are adjusted to actual results
determined at year-end. Our LIFO provision is calculated based on
inventory levels, markup rates and internally generated retail price
indices. At January 31, 2012 and 2011, our inventories valued at LIFO
approximated those inventories as if they were valued at FIFO.
We provide for estimated inventory losses (“shrinkage”) between
physical inventory counts on the basis of a percentage of sales. Following
annual inventory counts, the provision is adjusted to refl ect updated
historical results.
Impairment of Assets
We evaluate long-lived assets other than goodwill and assets with
indefi nite lives for indicators of impairment whenever events or changes
in circumstances indicate their carrying amounts may not be recoverable.
Management’s judgments regarding the existence of impairment
indicators are based on market conditions and operational performance,
such as operating income and cash fl ows. The evaluation for long-lived
assets is performed at the lowest level of identifi able cash fl ows, which is
generally at the individual store level or, in certain circumstances, at the
market group level. The variability of these factors depends on a number
of conditions, including uncertainty about future events and changes in
demographics. Thus, our accounting estimates may change from period
to period. These factors could cause management to conclude that
impairment indicators exist and require impairment tests be performed,
which could result in management determining the value of long-lived
assets is impaired, resulting in a write-down of the long-lived assets.